Life’s Money Rules – Rule 4: Anticipate Your Irregular Expenses

If I asked you to stop what you’re doing, add up your monthly expenses, and deduct the total from your monthly income, I can nearly predict the result. You’d look up with a big smile on your face.

There it is, proof that you spend less than you earn. Your income is greater than your outgo. You’ve nailed Rule 1 in my book, 7 Money Rules for Life: How to Take Control of Your Financial Future (Revell, 2012). And I would be a bit nervous. At first glance, your list looks reasonably thorough. But it is not complete.

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The mystery for many people is if their spending is so much lower than their income, why can’t they get through an entire month without using credit to cover unexpected expenses, like medicine for a sick child, a semi-annual insurance premium or a family birthday party?

Most people, without actually thinking things through, assume their necessary expenses are those they pay each and every month. But not all necessary expenses recur as systematically as the rent, grocery bill, phone bill and car payment. And that is why rule four in my book is: Anticipate Irregular Expenses Then Prepare Accordingly.

Bills, expenses and payments we make every month are generally not the problem. Somehow the rent and utilities get paid and the family gets fed. The problem is irregular expenses. The purpose of rule four is to plan ahead for irregular and even unexpected expenses in the same way you anticipate the expenses that you are keenly aware of each month.

But if these expenses are irregular or intermittent, how—you ask—can you anticipate them? The way to do that is by looking at the past year. And what better time to do that than now while you’re reliving 2012 in preparation for tax time. Your credit card statements and check registers will help jog your memory of car repairs, insurance policies, summer camp, seasonal sports and property taxes, to name just a few.

The next step is determining how much you’ll need to save to fund these irregular expenses throughout the year. As part of the debt-proof living plan, I created a budgeting tool that works on the same principle as a Christmas Club Account. I call it the Freedom Account. Once you determine how much you will need for your yearly irregular expenses, you divide that number by 12. Each month 1/12 of your yearly irregular expenses gets deposited into your Freedom Account.

I can’t tell you how many people I’ve heard from who tell me the Freedom Account has truly brought freedom to their financial situation. Instead of being surprised by things such as car repairs and Christmas, they’re prepared, funded and ready to go. And all because they’re smart enough to plan ahead by saving just a little bit every month.

If you missed reading about the first three rules: Spend Less Than You Earn, Save for the Future or Give Some Away—get caught up. We’ll be talking about each of the seven rules over the next couple of months.

Question: If you have a Freedom Account that funds your irregular and unexpected expenses, what’s the most irregular or unexpected expense you’ve ever funded? Tell us here.