How do you budget for annual expenses? Hey, it's Jon from Financial MD, welcome to today's Didactic Minute.
Now we talked about a budget and we always think of budgeting in terms of monthly expenses because we have a monthly income and that's a much easier way to handle it. If I know what I'm bringing in each month after taxes, my W-2, what hits my bank account, and I know what's going out each month, I can usually budget.
Now in our world, we do a concept called Reverse Budgeting, which we've gotten into in other videos you can check out. But it basically means trying to take care of the important things first and then living on what's left over; which is not a new concept by any means so I'm not going to patent or trademark that.
But we find that it works because it doesn't make you stay within certain categories: you can only spend this much on groceries and only this much on gas and only this much on travel or whatever. It just estimates what we might want to spend in those areas, and then what our surplus ends up being on paper we take care of that first towards our financial planning goals. Whether it's our emergency fund, our insurance, our investments, or whatever the case might be, we do that first, and then that basically gives you permission to live on what's left over.
And so when it comes to doing that monthly, that's much easier than trying to figure out how do we do that annually. So for example, if you travel twice a year, how do you budget for that when you get income monthly? If we do Christmas one time a year and you do birthdays throughout the year? For a lot of us, the age that we're at is weddings – good Lord, the weddings, constantly – how do we budget for that? Graduations – that's another one.
Some are just annual expenses like maybe you pay insurance annually or semi-annually. How do you do that? And the key is monthly-ized it -- I just made that word. It's not a real one. It sounds dumb, but you understand what I'm saying when I say it. Turn those annual expenses into a monthly one by setting up an automatic monthly transfer. I love automatic monthly transfers because it just makes it happen without you thinking. You don't even have to be disciplined. The only discipline is setting it up the first time.
And so you figure out what you're going to spend on that each year, whether it's travel or gifts – those are the big ones – and set up a separate subaccount – a savings account – that when that purchase comes, you can move the right amount back over to your checking but you know that it's being taken care of every month and planned for. So that's the key. Put a plan. Make it happen every month. You have the technology. You don't have to be disciplined every month and make this happen.
It's Jon from Financial MD, we'll see you next time.
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