Why Budgets Don't Work: The Failure to Plan for Predictable Expenses (Part II)

"I was doing just fine on my budget, and then the car insurance came due." OR "Everything was working well, but then the water pump went out on my car and it cost well over $300." OR "We haven't been on a real vacation for over 6 years, we just had to get away."

Many budgets fail because people don't plan for the expenses that occur predictably, but not routinely.

A routine expense is your mortgage—you know how much money it's going to cost and when to pay it. Your utilities are routine bills—and your car payment. Even though the dollar amount of some of these may have some small variance, you can usually plan a successful monthly budget. Even though for most of you, these routine bills are costing more money than ever before, these routine bills are not what cause budgets to fail. These routine bills can be planned and managed quite successfully.

Expenses that are not routine—but are predictable—are what cause budgets to fail. Predicable expenses are those that are going to occur—sometime. You know that because you know they always do. None of these expenses is an emergency. An emergency means it is UNpredictable. We are talking here about predictable expenses. Predicable expenses have to be included clearly in the budgeting process or your budget will not work.

So how do you go about budgeting for these expenses when they don't happen routinely? There are two steps.

In the first step, you will need to make a list of all expenses that occur over the course of a year. Make a list and calculate the amount of money you believe these expenses cost for the full year. All of the expenses. Some will be easy, like your car insurance. Car oil changes and tune-ups—Your dental checkups twice a year.—Your annual life insurance premium.—Your child's quarterly payment to the music teacher. All are relatively easy to calculate for this list.

You're not done yet with step one. You've just done the easy expenses. Now you will need to list the more difficult expenses. This list includes estimated car repair. Will you need a dental filling this year? If you own a home, you'll need to budget estimated repairs for the home AND home furnishings AND improvements. Are you planning a vacation? Do you celebrate any major holidays? How much do your clothes cost each year?

Keep making the list. These are the expenses that are part of your life—you know they are going to occur—they need to be in your budget if your budget is going to work. Once your list is as complete as you can make it—and includes the estimated amount of annual cost next to each item, go on to step 2.

In step 2, you will need to add up the annual cost of all the expenses on your list. The full total for the year. Divide this total by twelve. This amount of money needs to be set aside each month—saved—so that when one of these predictable expenses happen, you have the money to pay for it. This is no different than having the money each month set aside from your paycheck to pay for the routine mortgage bill. Only, now you are setting aside money for the non-routine, but predictable bills that come due sometime during the year.

This saving for predicable expenses is essential if you want a budget that really works.