Dinner at your favorite restaurant, or the dentist bill for next month’s cleaning. That technical gadget you’ve been drooling over, or your home owner’s insurance which isn’t due for 120 days. The new fall fashion, or the car inspection sticker that expires in 32 weeks. Which ones are you most likely to spend money on today?
Variable expenses often lead us on a financial rollercoaster when we assume that money in the bank is money available to spend. The only problem is that much of the “extra” money we have in low-bill months is already spent. We just haven’t received the bill yet.
It’s easy to assume that if it’s not in your mailbox, it doesn’t exist. But annual dentist and physicians visits, car maintenance, and health and auto insurance are not optional expenses. And we can’t excuse them as infrequent occurrences: “Well, I’m a little behind this month because the vet bill came in.” If you take your pets for their annual shots, the vet bill will come in every year. It shouldn’t surprise us, but too often it does.
Planning for Variable Expenses
The first step to planning for variable expenses is to know what those variable expenses are. Start a list and mark down how much you spend on each non-monthly expense. Here are a few to get you started:
- Quarterly bills (car, health or home insurance).
- Annual physicals, dentist visits and vaccinations.
- Pet care.
- Car maintenance, registration and inspection.
- Home maintenance.
Once you know how much you’re spending annually on necessary variable expenses, divide the number by twelve and deposit double that much into a savings account for the first 12 months. This will ensure that you have enough in the beginning months to use your Variable Expense Fund without it running dry.
After the first 12 months, you may consider halving the amount of money you are depositing into the Variable Expense Fund and putting the other half into a retirement fund, into CDs, securities or mutual funds.
Planning for Emergency Expenses
Planning for known variable expenses can be easier than planning for true emergencies. We don’t like to think about them, but they happen: medical emergencies, major car repairs, plumbing or electrical expenses, even the occasional speeding ticket can all take us by surprise.
Too often, the credit card comes out to pay for these unexpected expenses, but it doesn’t have to be that way.
Here are a few tips to saving for that rainy day:
HSA’s for medical savings. Health Savings Accounts allow you to put tax-free dollars into an account that will only be used for medical expenses. You can remove money from accounts for prescription medications, dental and vision care, doctor’s visits, X-rays, lab work and other medical expenses. These accounts are perfect for high deductible insurance plans. Ideally, you’ll want to save the total amount of out-of-pocket expenses that you could incur on your current health insurance. Of course, not everyone has several thousand dollars to set aside in an HSA, so start by depositing a set amount every month. Even setting $30 or $50 aside every month can help. As a bonus, these accounts accrue interest, and the interest is tax-free as long as you use it for medical expenses.
Limit your access. Sometimes the key to saving can be to limit your access to the funds. Of course, if you need the funds for emergencies, you don’t want to limit your access too severely. Short-term CD’s can be useful for this. You can get CD’s for terms as short as one month. For emergency savings, you can invest $100 each month into a short-term, 1 month CD. As the CD’s mature, roll them into more 1 month CD’s, always adding a new 1 month CD each month. When you have several of these in rotation, invest in a couple of 2, 3 or even 6 month CD’s. Just make sure that your CD’s are maturing in a staggered pattern, so that at any time, you’ve got a CD that will mature within 30 days. This gives you access to your interest-earning money, but limits the access just enough to make you hesitant to use the money for non-emergencies.
Automatic Withdrawals. An old standby: Save money by having it automatically withdrawn from your paycheck and set into a savings account. If you never see the money, you’ll be much less likely to spend it.
Start a piggy bank. Don’t underestimate the power of change. Instead of using exact change throughout the day, always pay with dollar bills. You’ll end up with a pocketful of change every day. At the end of the day, put that money in a good, old-fashioned piggy bank. In two or three years, you could easily have $1,000 or more in your Emergency Fund.
Saving money for variable and emergency expenses can take some discipline. It’s not fun to think about having to spend money on being ill or replacing your refrigerator. But you’ll feel a lot better about spending that money if you have it. If you constantly find yourself behind because of unexpected bills, it’s time to start planning ahead and being prepared.