Wednesday, October 06, 2010

Budgeting For Expected Large Expenses

Since we usually pay cash, budgeting for expected large expenses has helped us better manage withdrawals from our retirement savings.

First, we have several large expenses that we pay on an annual basis: insurance (health, auto, home) premiums, property taxes and income taxes due. We budget for these payments by calculating the equivalent monthly payment and adding that number to our monthly budget. That way we accumulate the money each month and have sufficient funds to make the payment when it's due.

Second, we have some large purchases that are more than a year away. For our next car purchase, my spouse has a separate account that is dedicated to saving money for that purpose. Currently, we have saved enough for about 1-1/2 new vehicles. This account is on track since we are about 5 years away from our next car purchase.

Third, for our daughter's future college education, we have been putting a set amount into a college 529 each year since she was one. Hopefully, the stock market will recover sufficiently to keep this account on track since she is still 13 years away from attending college.

A major expense area we do not currently budget for is home repair and improvement. Since we took care of many major items such as the furnace, air conditioning, roof and painting in the past four years, we consciously didn't set aside fund for the past few years. However, it's likely there will be some more major home improvements in the next 5 years so we will start setting aside money for this area again.

By budgeting money for these longer term expenses, we usually have close to 100% of the funds when needed and that minimizes the stress of having to make a large lump sum payment.

For more on The Practice of Personal Finance, check back every Wednesday Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC


pfstock said...

I had a question about health insurance. I was under the impression that it was mainly covered by the company you worked for. In this post you said "Currently, we are living on our savings accounts and getting health from my company." Maybe you can clarify this point? My point was that many people these days won't receive retiree health benefits and will not receive any significant pension, so you should consider yourself fortunate.

When you budget for an expense such as a new vehicle, do you actually establish a separate bank account for that? Or when you say "account" do you mean that you've earmarked a certain amount of money, but it is not held in its own dedicated account?

Super Saver said...

@PF Stock,

We do receive retiree health insurance, but it is not free. Since my company has very good retiree benefits, I assumed paying retiree health insurance premiums is the norm. For example, my dad, who retired from the government, also did not have free retiree health insurance and paid premiums. For reference, my insurance premiums are more than an employee's but much less than from an insurance company for the same coverage. I and my dependents (current and future) are guaranteed coverage as long as I am alive, regardless of pre-existing conditions.

Also, to clarify, I do not receive a pension. My company used a profit sharing retirement savings account which I received at retirement.

For our vehicle savings, we do have a separate dedicated account. It has worked well which is the reason I am considering doing the same for house replacement needs. For reference, when I was working, we didn't keep separate accounts for big purchases since we didn't use savings for everyday living expenses as we are now doing in retirement.