Have you ever gotten half way through a month or to the end of a month and realized that you don’t have enough money from regular income to pay all the bills? It’s one of those situations where there’s more month than income.
It may be that the property tax bill is due or the school fees. It’s not that this was completely unexpected (you knew it would need to be paid), although you may have forgotten that it was due this month. So, you find yourself either using the funds you planned to set aside for your longer-term goals or having to dip into your short-term savings that you had allocated to that trip abroad later this year.
You’re not alone. Many people—including very successful people—get caught from time to time. I’ve seen this happen a lot with people who relocate, as well as with those whose lives involve more than one country or currency. It seems to be a universal challenge, and frankly, it was a challenge that I used to struggle with too (despite being a Certified Financial Planner™ practitioner) until I stopped budgeting in the traditional sense and invented a better way to plan that was more in line with how we live our lives today.
So, I’m going to give you the key tactic you need as well as a tool that will take you from struggle to success very quickly. It won’t take much time, and it’s not complicated.
The issue with any irregularly occurring expenses and variable expenses is staying ahead of them. So, you need to know when they occur or are most likely to occur. Once you know the amount and the expected or planned timing, you can master this aspect of your financial management.
Go grab a pencil or pen and some paper so that you can get this figured out now.
First, let’s be clear about what I mean by variable expenses and annual expenses. Your variable expenses are those expenses that reoccur each month but can change in value from month to month. In other words, they can have a high level of discretion. Examples of variable expenses are clothing, food, and restaurants/take out costs as well as out-of-pocket medical expenses. What makes these expenses more challenging to work with is the fact that while you can estimate and plan for these expenses—meaning you can allocate an expected total for the year for example—the actual amount you pay out is going to vary from month to month.
Annual expenses are those that don’t typically reoccur during the year, such as membership fees and property tax. Some expenses may be paid more than once per year, such as estimated income tax payments, school fees, or lessons such as tennis lessons or dance or music lessons. These expenses do not usually vary.
Take a moment to identify those expenses that surprise you. These are the expenses you need to isolate so that you can have a plan to handle them. Take a moment to write down on a piece of paper all the expenses that you want to be sure you have sufficient funds on hand.
Once you have identified all the variable and annual expenses you want to handle, you need to determine the month in which each of these expenses must be paid plus the amount you will need to pay that month. So, sort your expenses by month. On a separate piece of paper, transfer the expense amounts into groups by month. Once you have all your expenses listed for each month, total each month.
Ideally, you have a spending plan that you can pull all this information from. A spending plan is different from a budget because budgets are based on the past. A spending plan is about telling your money where to go based on your current year priorities and doesn’t require figuring out where it went. So if you don’t have a spending plan to pull information from, that’s ok. It just means that you need to determine your typical monthly recurring expenses in addition to the annual and variable expense information. So, if you don’t have a spending plan, just make an estimate of the typical amount you spend each month on your fixed expenses, such as rent or mortgage payment, any type of debt payments, and phone and utilities.
Add this monthly amount to the monthly sub totals you have for your variable and annual expenses to obtain your projected total expenses for that particular month. Then, subtract this figure from your total monthly take-home income.
Identify which months have shortfalls, and highlight those months. The month with the greatest shortfall is key. This is where most people stop, but the secret to always having enough money on hand for your planned variable and annual expenses is to fund a special savings account that you can transfer funds into each month—and you need to fund this account with enough money to get through your first few months. How much do you start with? Start your variable and annual savings account with the amount of the shortfall in the most expensive month that you’ve just identified. If two or more months in a row are highlighted, you may need to start with the total shortfall for those months.
So, I hope you found this of value.
Now, get out there and try these ideas! You’ll be on your way to experiencing reduced stress and the relief of knowing you have enough money on hand when you need it. For a detailed action plan on how to implement these ideas, be sure to check out my new book. (link)