So far our intrepid heroine, Trish A. Example, has figured up her income, her expenses, and categorized her expenses into fixed, variable, and loan paydown/savings categories. One category remains: intermittent expenses.
Earlier we talked about Trish’s clothing expense. Trish’s normal habit is to spend nothing on clothing for two or three months, but then go on a shopping trip in which she makes a large purchase. Trish also has a few other intermittent expenses throughout the year, such as vet fees for her dog and car registration costs. Trish writes them down on a separate spreadsheet, then figures out how long it will be until they’re due. From this she can calculate how much she’ll have to save per month. Here’s an example:
But she doesn’t have that much money!
So how’s she supposed to pay for this?
Well, there are a couple of options:
- She could just not buy it. Please refer to my previous post on not buying things you cannot afford.
- She could buy it anyway with her credit card. I’m betting that this is what she was has been doing since she carries a credit card balance. Intermittent expenses are very easy to charge since they don’t come up very frequently and are easy to forget to save for. That’s another reason we’re doing a budget.
In our case, Trish has decided forgo the clothes shopping this time, and will charge the car registration and vet visit (since she needs her car to get to work and her dog needs to have its shots so it’s street legal.)
Well, since she has charged something, clearly her budget has failed and this whole exercise was a tremendous waste of time. She should just give up.
On the contrary! We’ve discovered the likely cause of Trish’s credit card balance (unless Trish says otherwise), as well as a good plan to fix the problem. How about, since we know when these intermittent will happen and can estimate their cost, we save up for them?
Allow me to introduce: the Savings to Spend account. It’s a savings account that will hold money you expect to spend in the next year or two. It’s a great place to save for those intermittent expenses that knock the stuffing out of the average person. While most people get surprised by the intermittent expenses (“it’s Christmas already?”), the Savings to Spend account helps you get ahead of these expenses so you can pay them with ease. Trish doesn’t have a Savings to Spend account yet, but she’ll start building one over the next year.
Is the Savings to Spend account the same as an emergency fund?
No. Traditionally an emergency fund is a separate account that is specific to emergencies. The rule is that you only get into the account if there is an unforeseeable event, such as job loss, emergency car repair, or the like. The Savings to Spend account is dual function: it acts like an emergency fund in an emergency, but it also is a place to put money that you will designate for short-term savings, such as putting money away for a vacation, furniture, new electronics, or to replace your car. It’s also a place where you tuck money away for those intermittent expenses, such as annual insurance payments.
But what if I have an emergency right away, before I have savings to deal with it? What then?
What would you have done without the Savings to Spend account? Cash flowed it from your regular monthly budget? Charged it? Borrowed some money from family or friends? Certainly you would’ve been in worse shape without a Savings to Spend account than with a Savings to Spend account?
Curse your logic. So what’s next?
Glad you asked! Next we’re going to look at the whole picture: Smart and Sassy Guide to Budgeting: Part 5: Income Problem.