A few years ago, I realized I had made a major mistake in my budget. In one month, I owed over $600 for various annual bills and yearly memberships. The frustrating part was that none of these bills were unexpected; I just hadn’t budgeted for them.
After that, I knew I needed to get a grip on my annual bills the same way I had learned to budget for monthly bills.
In this article, I’ll help you create a list of your predictable annual expenses and build them into your monthly budget in a manageable way.
Later, I’ll share additional tips for your first year and examples of other long-term/irregular expenses that you can prepare for using the same method.
Tracking Annual Expenses
To get started, make a list of all the annual expenses that you can anticipate.
Keep your list somewhere safe so that you can easily check for upcoming due dates and keep it updated throughout the year. I keep a simple “Finances” spreadsheet with one tab dedicated to annual expenses. You could just as easily keep a written list with your financial documents or save a note on your phone.
On your list, be sure to include the expense, the total due and its due date.
Here are a few examples of predictable annual expenses to get started:
Insurance premiums (auto, renters, home, life, etc.)
Property tax
Memberships and subscriptions (Costco, Amazon Prime, clubs, organizations, gyms, apps, etc.)
Vehicle registration renewal
Credit card fees
You can check that you aren’t missing any annual expenses by reviewing the previous year. Here are a few ways to identify recurring annual payments:
Review your bank statements
Search your email inbox
Use a subscription tracking tool or budgeting app
Once you’ve listed all your annual expenses, you can start planning for them. In the next section, I’ll take a closer look at how to break down these recurring annual expenses into a manageable monthly budget.
Planning for Annual Expenses in Your Monthly Budget
If you break up all of your annual expenses into monthly payments, you’ll be ready for those larger bills, fees and renewals when they’re due. The simplest way to budget for annual expenses is to take the total due and divide it by 12.
After listing my annual expenses and dividing the totals by 12, here’s what I had:
Nearly all of my annual expenses happen to be due during the summer. However, saving $90/month throughout the year alleviates the stress of owing so much at once.
You may notice that all of my totals are whole numbers and the due dates are either the 1st or 15th. These are two optional tips that work well for me:
Round up your totals slightly to prepare for rising costs.
Choose your nearest bill-pay day before the actual due date. For example, I pay bills on the 1st and 15th of every month.
With these two tips, I’m always prepared for the full bill before it’s due.
Pay Yourself Every Month
Now that you know what you need to save each month, follow your budget to be ready for your annual expenses. Treat your “Annual Expense Savings” amount like a monthly bill and pay it to yourself.
The best place for these monthly installments is in a high-yield savings account. Every month, contribute the same amount for annual expenses (total annual expenses ÷ 12). You can do this in one of three ways:
Manually transfer from your checking to your savings as if you were paying a monthly bill.
Set up automatic transfers from your checking account as if that monthly bill were autopay.
Set up direct deposit from your employer to automate your savings completely.
I recommend starting with manual transfers for the first 12 months before automating. You’ll likely need to make a few adjustments over the first year, which we’ll cover in the next section.
Also, if you use the same savings account for more than just these funds, be sure to track the money you’ve designated for annual expenses.
In my finance spreadsheet, I list each expense individually and add the monthly contributions after making a deposit. You could also track one comprehensive “annual expenses” fund.
As you approach due dates throughout the year, be ready to withdraw from your savings account. Since this can take a couple of business days, I always like to list my due dates slightly early.
The First-Year Formula
Dividing an annual expense by 12 is a simple way to break it down into monthly payments. However, the first year that you budget for an annual expense, you may not have 12 months before its next due date. For this reason, your first year might look a little different.
If you list an annual expense that will be due sooner than 12 months from now, you’ll need to save more for that bill until after its next due date. Then, you can re-adjust your monthly total.
To figure out how much you’ll need to save for each expense during the first year, follow this modified formula:
Total Due ÷ Number of Months Until Due Date = Monthly Savings
For example, I have an annual expense of $150 for renters insurance. Normally, I would need to save $12.50/month for 12 months. However, if the due date is only three months away, I would need to save $50/month. I can make this temporary change to my list with a note to update it after it’s paid:
Before Due Date (Due in 3 Months)
After Due Date (Due Again in 12 Months)
Once you’ve paid the upcoming bill, you can reduce its monthly savings to the original formula (Total ÷ 12).
After your first year, you should have a solid number to save each month for annual expenses. At that point, it’s safe to automate your savings. Then, you’ll only have to make adjustments if you add or drop an expense, or if its annual price changes.
Additional Expenses To Consider
In addition to regular annual charges, you can use this same method to budget for other non-monthly expenses, additional savings and emergency funds.
Consider the following categories:
Car maintenance (oil changes, tires, battery, repairs, etc.)
Home repairs and improvement
Back-to-school shopping
Holiday shopping
Medical expenses
Travel savings
Tuition
Pets (food, vet funds, etc.)
General emergency savings
While these categories may not have specific due dates and totals, you can estimate how much you’ll need and how frequently. If you aren’t sure, review your spending over the last year.
Then, you can use the same formula to figure out your ideal monthly contribution:
Total Saved ÷ Number of Months = Monthly Savings
For example, if I budget $900 to replace my car tires after five years, I can break it up to only $15/month with this formula. Alternatively, if I need ~$100 for an oil change every three months, I can save $33.50/month for that expense.
Final Thoughts
Planning for recurring or irregular non-monthly expenses is a great way to set yourself up for success. Using this method, you won’t have to rely on your emergency fund or other savings when an “unexpected” expense pops up. Instead, you’ll already have a designated fund prepared.
How do you plan for annual bills and other non-monthly expenses? Let us know in our Clark.com Community!
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