When we first started budgeting, we were unsure if we should budget every month for things like clothing, our semiannual car insurance or even things like Christmas.
At first, we did. We were building up funds for lots of irregular expenses. Each month we would put away a small amount for clothing, one-sixth of the car insurance and one-twelfth of the Christmas budget, plus money for a bunch of other things, like car maintenance and car taxes. As this money was building up, it bothered me. Here was all this money sitting there in a savings account making nothing, while we were paying interest on our debt. At the time, our car taxes were about $100 a year. Car insurance was $300 every six months. The Christmas budget was $400. None of these items were going to break the bank. We could easily cash flow these things in the month the bill came due or the event happened.
I stopped putting money aside for them and used the money toward the debt. How do I decide what to budget for monthly?
If I can pay the amount in full in the month I need to, I don’t budget for it monthly.
We could pay any of our regular bills that come due without setting money aside each month. Even when we had to replace the transmission on one of the cars, we cash flowed it. My snowball took a hit that month but we were still able to pay all of our bills, put some money toward extra snowball payments and not touch the emergency fund. Replacing the transmission was an emergency and we could have used that fund, but we didn’t need to.
If a bill is so large I can’t budget for it in a single month, I budget for it monthly.
If we had to pay our house taxes in a lump sum rather than paying into escrow, that is something we would need to budget for monthly. We could not afford that payment in July (in our town house taxes are paid annually). Look at the things you pay for on a quarterly, semiannually or annual basis. Could you afford to make that payment in full out of your monthly budget and still pay all your bills and buy gas and groceries? If the answer is no, you need to put money aside monthly for it. If you could pay for it, then you don’t need to put the money aside.
Some people like creating sinking funds or funds for larger irregular bills even if they have the money to pay them out of the monthly budget. If you want to do that, that is fine. Just consider how much you are paying in interest while the money sits there. Could you knock out another debt and free up more cash because you don’t have the monthly payment anymore?
The other thing I realized is that if I put money aside for clothes, I’m going to buy clothes. If I put money aside for home repairs, I will find something home related to spend it on (not necessarily repairs either). Stay intense and get yourself out of debt. Think of that you could do without any debt!