Periodic expenses include any expenses that come up occasionally, and often vary in cost. Periodic expenses aren’t quite as regular as fixed expenses, which stay the same on a monthly basis, or variable expenses, which can change quite a bit. Instead, periodic expenses can include quarterly or annual bills, or items like vehicle maintenance that come up now and then.
Here are some examples of common periodic expenses:
- Home maintenance
- Vehicle maintenance
- Vehicle registration renewal
- Property taxes
- Quarterly insurance bills
- Holiday, birthday, or anniversary gifts
- Annual subscription renewals
- School supplies
- Seasonal sport registrations or club dues
- Pet care, including veterinary check-ups and grooming
- Tuition, books, room, and board for college students
All of the costs above are somewhat predictable in nature, but they aren’t expenses you deal with every month. That’s what makes them periodic expenses.
Budgeting for Periodic Expenses: A Step-by-Step Guide
Planning for periodic expenses is far simpler than many people would expect. By using the proper approach, you can incorporate them into your monthly budget, allowing you to remain on top of the costs without having to resort to debt.
Here is a step-by-step approach for budgeting for periodic expenses:
1. Identify All of Your Periodic Expenses
First, you need to determine which periodic expenses apply to you. Consider costs that you deal with during the year that are guaranteed to come up again, either at a specific time or due to a particular triggering event.
If you’re concerned that you’re overlooking a cost, then review your spending over the past year. Look at old bank and credit card statements, examining every line item to determine which ones are associated with periodic expenses.
As you do, create a formal list. This can be as simple as jotting them down on a notepad. However, you could also use a spreadsheet or budgeting software, if you prefer.
2. Estimate the Annual Cost
Once you’ve identified all of your periodic expenses, you’ll need to estimate the annual cost of each one. Usually, there are two ways to approach this step.
First, you can review your bank and credit card statements to see how much you’ve spent during the past few years. While many periodic costs do fluctuate over time, this strategy can give you a solid ballpark figure to work with initially.
Second, you can find out what the periodic expenses cost today. You could head online to look for pricing information or contact area stores or service providers to see what they’re charging.
Just make sure you check with a few providers in your area along the way, as pricing can vary. Additionally, confirm whether any of the quoted prices include a discount of any time – such as a coupon or sale – ensuring you don’t underestimate the normal amount by mistake.
Once you know what it costs to handle the periodic expense once, you need to estimate how many times per year you need to cover it. Some periodic expenses happen at precise time intervals, such as one a year or every three months. Others are tied to events. For example, you may need to change the oil in your car based on reaching a certain amount of mileage.
After you find out how often you need to handle the expense each year, multiply the price of taking care of it once by the number of annual occurrences. That way, you have the yearly cost estimate.
3. Add 5 to 10% to the Estimate
After getting the average cost of your periodic expenses, you’ll want to add an extra 5 to 10% to that figure. Mainly, this is to ensure you have enough money available should the cost of the good or service you need increase suddenly. Supply shortages and inflation can all alter pricing with surprising speed, so adding the extra amount gives you a workable cushion.
How much you need to add may depend on the products or services involved. In some cases, you can research the average price shift during a year and use that as a guide. However, if that isn’t an option, use your best judgment or err on the side of caution and choose the higher amount.
4. Divide the New Figure by 12
After you add the extra 5 to 10% to the annual estimate, you’ll divide that figure by 12. That lets you know how much you need to set aside every month to handle that specific expense.
For example, if you spend around $150 per year on oil changes, you divide $150 by 12. That works out to $12.50 per month.
5. Add the Items to Your Budget
Once you know how much you need to set aside for each periodic expense, you’ll need to add those items to your budget. If you don’t have a lot of periodic expenses, you may want to keep them as separate line items. That helps you track why you’re setting the cash aside with greater ease.
However, if you have numerous periodic expenses, you may want to combine some of the costs into categories together. For example, you may create a vehicle maintenance category and add together how much you need to set aside for oil changes, tire replacements, and all other related expenses.
If you go with the latter approach, you may want to keep your original list as a reminder. That way, you can review it if you can’t recall which expenses you included in that group.
Where you position these items into your budget may depend on how you usually manage your expenses. For instance, if you handle all of your required payments all at once, where you set them may not matter. However, if you tackle specific expenses with particular paychecks, you may need to work them into your budget in a balanced way. Use whatever approach makes sense for your situation.
6. Choose a Place to Hold That Money
Now that the items are in your budget, you need to decide where you’ll keep that money. There are several strategies that can work. Some people may prefer to use high-yield savings accounts. Many institutions allow you to open multiple accounts, so you can designate specific ones for different purposes. Plus, it gives you a chance to earn interest.
However, the envelope system can also work. You can take cash out of your account in accordance with your budget and set the individual amounts aside in envelopes labeled for different periodic expenses. If you use this option, just make sure you keep the envelopes in a secure spot, like inside a small fireproof safe.
Just don’t let your periodic expense money mingle with your emergency fund. This can make it hard to track how much you have set aside for planned costs and what’s designated for genuinely unexpected events. As a result, you may end up under-saving for one or both simply because your account balance gave you the wrong impression.
7. Update and Adjust Annually
As you go through the year, track how much you spend on each periodic expense. By logging the last price you paid, and when you handled it, you can get more information that lets you refine your budget.
You’ll spot price increases as they occur, allowing you to recalculate how much you need to set aside. Then, you won’t get stuck without enough funds to cover the cost down the line.
If you spend less than expected, you can either recalculate or designate the excess money for another purpose, like funding a retirement account or boosting an emergency fund. Just make sure that you don’t factor in any sales or other discounts – like coupons – if you recalculate. You can’t guarantee those will always be available, so it’s better to only use the full price when calculating how much you should set aside.