My wife and I both have term life insurance policies. My annual life insurance premium is due in November. Her premium is due in December. In a perfect world, I’d divide my annual premium by 12, place that amount in my checking account each month, and then pay the bill in full when due. But, what do you do when you have an “annual” expense, but you don’t have 12 months between the due date and today?
Option 1: Calculate the number of months between today and the day the annual bill will be due. Divide the premium by the number of months. Let’s use my life insurance premium as an example. The bill will arrive at my door at the end of November. So, counting November, there are about 6 months between now and then. Simply divide the annual premium, say $300, by 6 months, and deposit $50 per month in your checking account. When the bill arrives, make the payment.
Option 2: Simply budget for the expense in the month that it occurs. Let’s take a look at my wife’s premium, at $250. So, in the month of December, I’ll create a budget category labeled Life Insurance. I’ll simply budget $250 in December for Life Insurance. If you use this method, you must be prepared to cut expenses in another budget category, Entertainment, perhaps.
Option 3: Create a budget category labeled Annual Expenses. This works really well if you have several, similar annual expenses. You might have an automobile insurance premium due in January, a life insurance premium in April, a renters’ insurance premium due in September, and automobile taxes due in December. Estimate the total amount of all of these annual expenses, divide that amount by 12. All of your annual expenses become one big budget category. In some cases, you might be paying a different annual expense each month. So, instead of breaking down each expense into it’s individual category, one category will suffice.
Option 4: Don’t budget for annual expenses. Instead, set aside as much as you can in savings, every month, and then make annual payments as they come due. This is similar to Option 3, but allows for the fact that your annual expenses may change, you may incur new annual expenses, or you simply don’t like to deal with the “math” involved.
Option 5: Ask the companies with which you do business to bill you on a monthly basis, instead of an annual basis. For instance, I have the option of paying my automobile insurance monthly, annually, semi-annually, etc. (Bonus fact: MANY companies will give you a discount if you pay your bill on an annual basis. Do the math! Determine if the discount is worth it. Or would you be better off leaving your money in the bank, accruing interest?)
There are some annual expenses which vary, year after year. Examples include property taxes and health care expenses (out-of-pocket). Let’s assume that the maximum out-of-pocket expense associated with your health care plan is $2000. You have a choice to make. Do you divide $2000 by 12, and deposit that amount into your checking account each month, “just in case”? Or, do you hope that your family has an extra-healthy year and not worry about it? Here’s what I do. I acknowledge the fact that I could have to fork out the maximum amount. But, I also know that we’ve never come close to paying out that much in one year. So, I split the difference. I budget a specific amount for Medical, each month, and then I prepare to “dip” into my Emergency Fund, should expenses be higher that I anticipated.
One more thing. If you use a savings account to “stash away” money for annual expenses, be aware that MANY savings accounts have limits on the number of withdrawals you are allowed to make in a month (or quarter). For this reason, I prefer a money market account or interest-bearing checking account.
If I have not already budgeted for irregular expenses, I “borrow” from my savings account and then “pay myself” back in monthly installments over a period chosen based on the amount of the expense.
For example, I get a discount for paying my car insurance in one lump sum, so I pay in cash, and then pay myself back in monthly installments. I do it all by setting up reccuring transfers to my EmigrantDirect account.
Depending on the mood I’m in when I set up the transfers, I even include interest that I’m losing by not having the money in my account.
I do option 3….only I do it by taking the total amount I’ll need for all of those categories and divide by 52. Then every week ING automatically takes that much out and it’s there when I need it. 🙂
If you get paid every fortnight there are actually 13 months in the year. 26 pay packets divided by 2 gets you to the 13 months. This is a factor for option 3, which I use for annual expenses.
When I pay an annual expense I forecast how much it might increase the next time it’s due and I adjust my saving category accordingly.
I do option 4. Simpler for me and it works out the same in the end.
What I do is I count the weeks from now to when I have to send the payment and then divide the amount by the weeks, and each week I have the money automatically transferred to my savings and don’t touch until the bill is due. This works for me and my husband because he get’s paid weekly so every friday the money is gone so it is like we never had it the first place.
I WANT to do Option 3, but when I’ve calculated the total amount we would need to set aside per month, we are too close to the financial edge to make it! So, THIS year, until we get a better grip on things, the plan is a mix of #4 & #5. Since biweekly paychecks gives you two extra paychecks a year, and we will have tax returns, I’m hopeful we’ll have enough. If not, there’ll be monthly payments to insurance companies. The debate at that point becomes does extra money (per month) go to pay off these bills OR to pay down debt OR to save up for next year
BTW, for medical, and other deductibles I have (phew) socked away enough. We have a medical FSA so if I have to, I pay out what we owe then replenish when we get reimbursed. If a biller can wait a month=non issue!
I have to say this is definitely the hardest part of a budget! Thanks for addressing it and allowing others to share their strategies. I would also love to hear what folks factor in as annual expenses. My list includes a few annual fees, two annual utility bills, insurance, property taxes, car registrations, tuitions, and [most fun] Gifting.