Budgeting can be quite difficult, even if you have a really good system and are on top of your expenses. Life is full of surprises and unique situations that pop up including in our finances. One interesting topic came up from a reader, “Dear YMF, how would you plan for and budget a larger non-monthly recurring expense? Think a quarterly gym membership or annual car insurance”. I certainly have a few thoughts on the topic but did ask around just to see how some other budgeters would handle it. Here’s what I learned!

Budget vs Cash Flow

Most young professionals that I talked do did something similar to what I do – view budgeting as more important than cash flow. What that means is that the balance in my checking account (where my paychecks go into and where my bills are paid out of) doesn’t accurately reflect my current financial standing (i.e. my budget). I budget my income to a penny; I tally up how much I earn each month and account for all of it, essentially I either spend it or save it. I put about 99% of my spending on credit cards (big fan of reward credit cards) and pay off the balance each month. When I buy something, the credit card bill won’t come until a few days after the end of the month and then I have some time before the actual payment is due. So, it could be 4-6 weeks before that $5.99 latte is actually paid for out of my checking account. I get paid every other Friday, and Mrs. Money gets paid at the end of the month.

All that to say, at any given point in time my checking account doesn’t equate to my actual budget. I view my budget as the ‘source of truth’, and view my checking account as a holding vessel that’s always being replenished and paid out. I don’t fully know what’s ‘in my checking account’ but I know (because I budget well) that I have enough to pay my bills when they are due.

Checking vs Savings

Two common accounts that you probably have with your bank are a checking and savings account. I have one of each at my main bank (which is a large national bank) and then have a few savings accounts in online banks (Capital One and American Express) to earn more interest (although the interest is laughable right now).

As previously discussed, I use my checking account solely to hold my paychecks and pay my bills. I don’t keep per say an accurate log of what’s in the balance, I just know I have enough to pay my bills each month, because I budget all of my income and make sure I don’t go over each month (or if I do I pull from savings to make up for the short fall).

Each month I attempt to save and invest money, and that gets moved out of my checking account into my savings account or my brokerage account. In my main bank I only keep about $1,000 in my savings account there. I do that as a just in case I need it right away as I could quickly move it to checking or withdrawal money via an ATM if need be. It pays like 0.00000001% interest (slight exaggeration) so I don’t keep too much there. Outside of that I have high yield savings accounts in Amex/Capital One where I earn a meager 0.5% but hey better than nothing! I like to think of cash savings accounts as money I’ll need in the next 1-3 years so I keep them in cash vs putting them in an index fund in the stock market. I.e. I have specific plans for that money. Outside of my emergency fund (always cash), I have named accounts: house fund (for housing repairs/upgrades…Mrs. Money if you’re reading this it’s for our bathroom reno one day!), a car fund (I’ve always paid cash for cars) and a leftover grad school account that Mrs. Money used when she earned her Masters. I could in theory just have one account and keep a spreadsheet that broke down the balance into those separate funds; instead I just like to have them in separate accounts. All the same regardless.

A recurring non-monthly expense

Back to the original question of how one should budget for a recurring non-monthly expense. What I do is as best I can, figure out what it would be each month (i.e. a $300 quarterly gym membership is $75/month and add that in as a line item into my budget. If I was confident in my ability to hit that number each month (i.e. not spend it in other places), I would probably just not worry about keeping track of that quarterly payment and when it is due, I know that I’m saving the appropriate amount each month to account for it.

More accurately what occurs is I forget about the upcoming amount until a month or so before it’s due and then I frantically try to over save up to pay for it. I tend to do this when my credit card annual fees come due. For example I know that my $695/year credit card is coming due in September. Although it’s not like I forgot it was coming due but I just didn’t prioritize it until now (June). From here on out I’m going to try to put $175/month aside. Often times what actually ends up happening is that there’s not much wiggle room in my budget in my general living, fun or travel buckets and so I end up pulling out of my savings or car savings fund (as I mentioned I pay cash so I’m always trying to put money aside for the next car). I’m not sure why but I always set my savings goals high each month but don’t often achieve 100% of that goal. I suppose I’d rather save less than my lofty goal vs. just automatically spending more. So there’s always a bit of wiggle room in my savings number and that often goes to filling other shortfalls in my budget.

Putting it aside

I mentioned putting my money aside and what I meant by that is I keep it in my checking account. I suppose if I didn’t need it for closer to a year I’d probably be more inclined to put it in my savings account where it could earn some interest but mostly I just keep it in my checking account. In my monthly budget spreadsheet, I have a section at the bottom for mini-buckets of funds that are in my checking account. I have money set aside for: credit card fees, kiddos 529s (college savings) and daycare. So outside of my normal bills that are paid, I know that I have some money set aside for a specific purpose! When the time comes for me to spend that money, I simply subtract out that amount.

What others do

I was a bit worried that I was overthinking this question when I solicited insight from others but I ended up getting mostly similar answers to how I do it. Some friends told me their bank is good about setting up ad hoc bank accounts and they proactively put that money in those temporary accounts, and others said they just use a savings account. Another friend tries to start and end each month with the same amount (i.e. $10,000) in their ‘operating’ (checking) account and if they’re over at months end they move money into savings and if they’re under they pull from savings.

Summary (TLDR)

Budgeting and cash flow can be confusing and tricky. I’ve found it to be simpler to just track all my income/expenses and then just assume what I have in checking is enough to pay all the bills. It’s worked so far during my young professional career! When I have a larger non-monthly recurring expense, I try to a) remember it b) plan ahead for it by breaking it up into monthly bite sized chunks and c) once it’s accounted for I notate that it’s sitting in my checking account.