At the Need2Save household, we like to break our expenses down based on time horizon. For us, that results in three buckets:
- Monthly Recurring – NOW
- Near Term – SOON
- Long Term – MUCH LATER
The monthly recurring expenses are things like your mortgage/rent, cell phone bill, Internet bill, television service, etc. These expenses are typically fixed and can easily be accounted for in a budget. We also consider our food (grocery and eating out) as a monthly recurring expense, even though it’s not a fixed price. With a little bit of monitoring (we use Mint), it’s easy to get an idea of how much you are spending on food and budget accordingly.
Our long term expenses are for our FIRE life! We are saving and investing significantly now, so that we can leave the 9-to-5 world. We are maxing out our 401(k) and HSA accounts. We also invest much of our disposable income into our brokerage accounts. When our sons were younger, we also considered our 529 college savings as a long term expense. Hopefully you treat these longer term expenses as a recurring monthly expense like your other bills. Pay yourself first!
That leaves the murky middle.
What We Consider To Be Near Term Expenses
We know that there will be some expenses that will be coming down the road at some time. They aren’t month-to-month expenses, but they aren’t decades in the future either. Here are a few items we consider to be near term to medium term expenses:
- Vacations (we love to travel)
- Christmas/Holiday Spending
- Annual Insurance Costs (Automobile, Umbrella, some crazy water insurance that came along with our current house)
- House Maintenance
- Future Automobile purchases and maintenance of current vehicles
- Other ‘Lifestyle’ purchases
Generally speaking, these are annual or near-annual expenses for our family. Most of those categories are self-explanatory. I’ll explain the lifestyle purchases though. I admit that this is mostly Mr. Need2Save fun money. We have one section for Fitness which covers things like pool memberships, race entry fees, running shoes, bicycle stuff, more running shoes, etc. I also have a Geek Bucket section that covers gadgets, computer parts, etc. – I’m a curious engineer 🙂
How We Save For These Expenses
Mrs. Need2Save and I have been married for 21 years. We have always been in sync in regards to credit card debt – it’s unacceptable. (Luckily, we are in sync on more than just that). I don’t think we’ve paid a single cent in credit card interest in the last twenty years. If we can’t pay for something in cash, then we don’t buy it. An exception to that rule has been the mortgage on our house and automobile loans early in our careers. That said, we bought our last three cars in cash, so no more automobile loans for us. Part of our ability to do that is we save every month for future automobile purchases and to maintain our current vehicles.
Our method for preparing for and managing near term expenses is simple. We use a Google Sheets spreadsheet to track our projected near term expenses and we divide the cost by the number of months before that expense is due (typically 12). Categories (e.g. vacation, insurance) go in the columns and months go in the rows. The image below shows a portion of our simple spreadsheet for August and September of 2017. It isn’t much to look at, but as long as you keep up with recording the negative expenses in addition to your monthly saving additions, it can keep a running tally of how much you have in each ‘bucket’.
For each month, the numbers in blue are what we save for that category each month. So you’ll see that we save $100 a month for propane (home heating and cooking), $100 for Christmas, $50 for the Geek Bucket, and so on. Underneath the contribution amount, we record any expenditures for that month. In August you’ll see that Mr. Need2Save spent $585 out of the Geek Bucket to build a Linux server (can’t get much geekier than building a Linux server!). It looks like we also had some significant car expenses in August to the tune of $506.
One of the columns we noted is for “Christmas”. We save $100 a month so we don’t have to worry about enjoying the holidays and derailing our savings at the end of the year. This may sound like a lot of money, but it includes gifts to our immediate family, buying a tree, sometimes small holiday gifts for coworkers, and all the extras we spend money on around November/December. Sometimes we host our extended family for a large family meal and these funds come in handy for those large expenses. We’ve also sponsored other families in our area in prior years by buying both gifts and food for families in need.
At the end of each month we reconcile how much we need to transfer from our checking account into this dedicated savings account. We make periodic adjustments to this savings plan (looks like Mrs. Need2Save bumped the vacation budget). When we need money for an expense, we either transfer the required money back into our checking account or adjust the contribution amount for a month.
Why This Simple System Works For Us
The beauty of this system is that we are hardly ever surprised by an expense that occurs occasionally (like paying our car insurance premiums or filling up our propane gas storage tank when needed). It keeps us from having to dip into our Emergency Fund or reduce our other savings to meet a sudden expense. And we certainly don’t have to sell any investments to pay for these things either.
Some people also call these ‘sinking funds.’ Sure, there will be those that say we are letting some of our cash sit idle, but we need it to be liquid since we expect to pay for these things in 12 or fewer months and by spreading out the expense over the whole year, we can devote greater attention to adding to our others financial goals like paying down our mortgage and saving for Early Retirement! And it frees us to attack those important goals on a steady year-round basis.
This simple system has worked well for us. We always have the money saved up for these near term expenses, so it’s not painful when we need to pay for some of the larger expenses. It’s also nice to conveniently see how much we spent on certain items and categories over time.
How do you save for these type of expenses?