There is a difference between bills and expenses.
A lot of people who talk about personal finance don’t distinguish between them. They say it’s all your “outgo” or just “what you spend money on”.
But a car insurance payment is very different from the sandwich you bought.
Unless you subscribe to the Sandwich of the Month Club, or are just particularly habitual, your sandwich purchases are going to vary by day, by week, by any measure of time.
On the other hand, a car insurance payment is a regular and predictable expense. If it changes amount, it’s usually once a year or so. They aren’t “lumpy”.
Why would you treat these two different cases as the same?
Bills are the regular predictable expenses. When you’re determining how much money you have to spend in a given month, you take your income, subtract your bills, and whatever is left is your expenses. Which can be as irregular as you want.
But what if your bills are irregular? Do you treat them as an expense? Or do you just deal with your bills being lumpy?
Well, you can do it however you please, but I think that the best way to do this is to work to minimize the lumpiness.
I encountered this recently in a few different areas. Here’s how I made my bills less lumpy.
What to do with a bunch of fees?
I have a bunch of membership fees that come up once a year. They are various amounts, usually in the high two digits or low three digits.
What I’ve done in the past is just count these as expenses, as they are irregular.
But I don’t like having periodic expenses that are reasonably regular and intermittent. I don’t like having to, for example, pay $150 every December, $40 every April, etc. What category do I put that under?
Realizing that I have a number of these fees that I pay, I realized that I could create a bucket for them. A “fees” bucket, if you will.
So this is what I did:
- I created a savings account (I used Ally, which makes this sort of thing much easier these days).
- I then summed up the total amount of these various fees that I pay over the course of a given year
- I divided that amount by 12.
- I created an automatic transfer of that amount to this new savings account.
Now, whenever I have a fee to pay, I take it out of this bucket. As as for tracking purposes, I no longer look at the fees as expenses, but instead, count the regular amount I put into the savings account as a bill.
Take for example, the following fictitious but representative situation:
Fee #1 (April): $75
Fee #2 (June): $140
Fee #3 (August): $50
Fee #4 (November): $225
Fee #5 (December): $65
If you started this in January, by the time April rolled around you’d have $160, and after you paid your first fee of $75, you’d have $85 left. By the time June rolled around, you’d have $165, and after you paid your second fee you’d have $5. And so on.
If you set this up, you want to make sure that you have enough in this account to pay for the fees when they happen. Otherwise you’ll encounter the same issue as if you don’t have enough float in your account: you won’t be able to pay for what you need. This would defeat the purpose.
But this is just one way that you can make your expenses more predictable, which can help you plan more effectively. And the more predictable your budget is on the whole, the more at ease you’ll feel about it.
After all, no one likes too many lumps.
Have you set up a system like this? How did it help you?
- The Roth IRA danger zone (part 4): How to withdraw an excess contribution at Vanguard - March 9, 2020
- The Roth IRA danger zone (part 3): How I resolved an excess contribution - March 2, 2020
- The known unknown: On preparation and getting laid-off - February 24, 2020