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How to Budget for Big Expenses

No matter how detailed your monthly budget is, life will occasionally throw an unexpected and possibly large expense your way. This may make it difficult to keep your spending consistent from one month to the next. If you’re living paycheck to paycheck or trying to keep spending to a minimum, these irregular costs can sometimes throw your planning out of whack.

If your finances are already tight, a large upcoming expense can feel like an undefeatable obstacle. Budgeting and planning your finances out in advance can help you overcome the hurdle of large expenses.

“We can all benefit from budgeting in our day to day lives, and especially so for large expenses. We encourage our members to budget as soon as possible because you never know when an unexpected cost will occur”, said Bernice White, CLO.

Determine the amount of the expense and your timeline

Before you start budgeting, figure out what you’re up against. How much money do you need, and when? For large expenses such as buying a home, the timeline can be more flexible to accommodate what you’re able to afford. Other expenses, such as college tuition, present more of a deadline. By figuring out the size of the expense and how long you have to save, you can create a practical savings plan to meet that goal.

Make space in your budget for monthly savings

Divide the amount you need to save by the number of months you have to build up those funds. The result is the amount you need to save every month. Once you have this number, it’s time to revisit your budget and figure out where you can account for this added expense.

If the large expense you’re planning for is important, it is smart to budget for it as a fixed expense, placing it alongside rent, car payments, student loans, and utilities, and above recreational spending on restaurants and entertainment. If you’re saving for a vacation or another nonessential cost, you might choose to be more flexible about your savings plan. However you approach this process, your budget should be balanced in the end to account for monthly savings that will have you on track to afford the expense.

Put dedicated funds in a safe space

As you save, make sure your funds are being placed in a safe location away from your checking or regular spending accounts. Whether you use a savings account or another dedicated account or fund, it is best to place this money out of view to save you the temptation of spending it before you can put it toward a major expense.

Budgeting for expenses that come each year

To budget for annual costs, like holiday gifts and property taxes, you can set aside a small amount each month into a savings account, and accumulate funds to cover these predictable expenses. Base your budget for these expenses by thinking back to your previous year’s spending. Add everything up and divide this sum by 12 to figure out how much money to set aside each month.

Budgeting for occasional, but unplanned expenses

You can budget for occasional expenses, like having your car serviced or upgrading electronics, by creating special funds marked specifically for maintenance. Determine how much you’ll need to spend for the year and contribute a small amount every month to a special savings account for this category. However, you might choose to contribute $600 a year, or $50 a month, to these types of expenses. Your goal should be to have special savings accounts that are large enough to cover these occasional repair and maintenance costs.

Budgeting for true emergencies

A real emergency is a larger unplanned, unpredictable event like a job loss or a no-fault car accident that requires a lot of out-of-pocket costs. This is different from an “occasional expense” like a car repair, which happens often enough to be predictable.

For this, you can add money to an emergency fund and consider applying for a credit card that you will only use for such emergencies. Calculate how much you need to have in your emergency fund and do some division to figure out how much savings to budget each month so that you can get enough dollars into your emergency savings.

Everyone’s situation is unique, but, as a guideline, building an emergency fund large enough to cover three to six months of your total living expenses, will help tremendously for an unexpected event. Aim for a savings amount that covers closer to six to nine months of living costs if you’re self-employed or have irregular income. In the event that you are unable to work, make sure that you have at least two to four months of living expenses set aside to compensate.