When establishing a budget, it is important to account for variability. Some monthly expenses change a bit each month, such as your energy bills, others are paid bi-annually or annually instead of monthly, such as taxes, and some pop up unexpectedly. Others expenses may vary in their amounts each month.
Knowing how to anticipate your expenses will leave you with a solid budget that is always in the black.
First start with the stable expenses, those that do not change from month to month. Some examples might be your car payment, your mortgage payment, or a student loan. You can easily budget for these expenses, since they never change.
Next, tackle budgeting for expenses that are stable but aren’t normally paid on a monthly basis. They may be paid annually, bi-annually, quarterly, or some other arrangement. Typical expenses that might fall into this category include certain taxes, homeowners association fees, insurance and maintenance contracts.
One of the easiest ways to budget for these types of expenses is to total up the annual cost and then divide the amount by 12. So, for example, if you have to pay association fees of $150 each time in January and June, you can total it to $300 and then divide that amount by 12, leaving you with $25 that must be budgeted each month. It might be easiest to put this money in a separate account until the bills need to be paid. This way, you won’t be tempted to spend that money. Be sure to monitor any increases in these amounts, so you can budget accordingly.
The next area of budgeted expenses to tackle are those regular monthly expenses that vary in their amounts. Some examples of these types of expenses include utility bills, such as your electricity, water or fuel. The amounts may change according to how much of these resources or services that you use in any given month. There are two different ways that you can easily budget for these type of variable expenses.
The first way is to review your bills over the last 12 months. (Most bills usually contain a summary, or you can call and get copies of your bills if you no longer have them.) Find the highest bill and budget that amount each month. This will give you a cushion, and any leftover money at the end of the year could be transferred into savings or extra holiday spending.
The second way is to average out all of the bills and use that as your budgeted amount. The money left over from a low month can carry over to be used for a higher month. Again, it is easiest if you allocate anything leftover from these payments into a separate account. Which method you choose is up to you.
Finally, there are those expenses that are not regular and can vary. They are the day to day expenses in which we tend to overspend. Examples of these budget items include food, entertainment, clothing, household expenses, pet care, etc. Each of these categories may even be broken down further. For example, entertainment could include everything from eating out to the cable bill to vacations. These areas can be the most interesting and the toughest to budget, but because many of them are discretionary, you can have a lot of flexibility as to how much gets spent in each area. Don’t forget to include regular savings and emergency savings in the mix.