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While helping people create and maintain budgets, the most common error that keeps popping up is the failure to budget for non-monthly expenses. This is common because usually you do not notice it at first and think things are going well, until one month when the bill comes unexpectedly and you feel like you got hit by a brick wall. This causes you to get frustrated, lose hope, and prevents you from getting ahead financially.
What causes you not to save for non-monthly expenses? Simply put, when making your budget you typically focus on current expenses for that month such as food, rent/mortgage, and debt repayment. But you forget about your semi-annual car insurance payment, the annual life insurance premium, and that Christmas is soon approaching. Then comes the time when the bills are due and you do not have the money saved. That leads you to panic and make desperate moves that get you back into debt or raid the emergency fund. It is one big endless cycle that is difficult to break.
The solution is to put these items in your monthly budget. First, think of everything you can that you do not pay monthly such as hair care, oil changes, car and license registration, annual home owner’s association dues, and car repair such as tires. Next divide the payment by the number of months the payment represents (ex. annual payments divide by 12, semi-annual by 6, quarterly by 3, etc.) and put that amount in your budget. Then save that amount in a checking account and when the payment is due you will have the correct amount saved in your account to pay the bill!
Taking care of non-monthly expenses is an important but often overlooked part of budgeting. It can be a pain and an annoyance to have money sitting in an account that you will not spend for 5 months while you have outstanding debt. But developing the discipline to plan ahead for future expenses will eliminate the “emergencies” created by not having enough to cover your non-monthly expenses.