First of all, I spent several years creating budgets, analyzing and amending budgets, and evaluating performance to expectations for government organizations, businesses, and non-profit organizations.
A few years ago, when I started looking at personal finance issues, I was not surprised to learn that one of the first steps recommended by “experts” on how to get out of debt, repair credit, or simply manage money effectively. It made sense to me. After all, as an accountant, business manager, and fiscal consultant, I had personally seen how budgets were made, how they worked, and how basic they were to the financial plans and decisions of any organization. I immediately saw how this translated into personal finance decisions.
The family, or even the individual, is, in terms of money flow, an operating business, and it needs to operate in the black. A complete budget is an important tool in this process.
However, as I looked at the instructions in many articles and even some highly recommended books, I saw two areas that seemed to be often overlooked.
1. “Incidental” expenditures
2. Periodic expenditures
I put the quotes around the word “incidental” (oops…did it again), for a reason.
Most of us, and many of the personal finance advisors I read tend to overlook these common, but generally small cash outlays when creating a budget. However, these small, unobtrusive expenditures can often be quite significant.
For example: I used to stop on the way to work and get coffee and a snack at a local convenience store. On the way home, I would often pick up a cheap, only a dollar, burger or taco, so I wouldn’t get home hungry.
These purchases, made almost daily, did not register on even MY cash meter because they were small, paid out of my pocket, and did not hurt at the moment.
However, when I sat down and added them up, they came to over $60 a month!
For many, an extra $60 a month could be a make or break figure. Even if it is not that painful a cost, if you don’t know that it specifically exists, you could suddenly find yourself short on grocery money at the end of the month.
Putting incidental expenditures in your family budget not only creates an awareness of what is actually a relatively major cash outlay, but prevents it creating a hidden cash drain which depletes your actual availability of funds.
Also, simply making note of this fact, as I did, can save you a lot of money. I could make my own coffee before leaving for work and take healthier snacks than what I got at the convenience store for a lot less expense. In fact, by making just a couple of those kinds of changes, I saved nearly $50 a month, stopped having to spend nearly 10 minutes a day, and a lot of frustration, getting into and out of a busy convenience store, and got to work a few minutes earlier so that I was able to get in a walk, which was good for my health.
Hey! Being healthy saves you a LOT OF MONEY!
However much including incidental expenditures in a monthly budget might be, including periodic expenditures can be even more important for many people.
As an accountant, I generally worked with annual budgets, and built them using monthly data, and provided monthly budgets as well. However, in a situation like that, a large expense due in October, was simply included as a matter of course, and the expense was often covered by an annual income, such as a government grant.
Unfortunately, the ordinary individual or family cannot depend on some massive amount of money showing up at the beginning of THEIR fiscal year, or at periodic intervals. Most of us simply get a paycheck every couple of weeks, weekly, or even once a month.
The monthly budget prepared by most families only deals with that income and how it is going to be impacted by such expenses as rent or mortgage payments, car payments, insurance, utility costs, etc. However, for many, there will be fees or expenses which will show up periodically, for which they have not included in their budget.
For example: I once lived in an area which had extremely high property taxes. My annual property taxes were approximately $2,400. That meant that one month each year, I had to come up with that amount of money. My discretionary funds available each month at that time were just about that amount. This meant that, if I did not prepare and account for that large periodic expenditure, I would find myself suddenly short of funds in that month.
What happens to people in these situations is quite common and well known to personal financial advisors.
When suddenly hit with large expenses which they have not prepared for, people may put them off, creating not only personal stress, but resulting in higher costs as the taxing agencies, or credit card companies, may add interest and penalties.
Also, the bill will have to be paid sooner or later, so the hit to the wallet is going to come. When people are under this kind of financial stress, people often resort to financially inefficient means of coping. Some, for example, will take out loans at unreasonable interest to pay one debt, therefore creating another which will affect their monthly cash flow for some unknown length of time.
It is simpler, and much less expensive, to simply anticipate such periodic expenditures when creating a budget. Using my example above, if I know in January that I am going to have to pay $2,400 in October, I have nine months to prepare, setting up a monthly budget amount of $267 which will be taken out of my discretionary funds. Slightly painful perhaps, but less painful than what might happen in October, or November, or December. As you can see, if the time is a full year away, I can actually budget that expense over a full 12 months, in this case, making the monthly budget set-aside only $200.
Any budget is only as valuable as the information included within it. If you are leaving out items such as incidental expenditures and periodic expenditures, you are setting yourself up for some nasty financial surprises.