The thought of creating and sticking to a budget can be a drag for even those most enthusiastic about their personal finances. The word "budget" is a major turn-off because it usually connotes setting limits. Instead, we like to use the phrase "spending plan." Most people enjoy spending money. Having a plan for spending... and saving money is key to a healthy relationship with your finances. Unfortunately, even the most detailed spending plan can be derailed when a significant expense comes along. We want to help with the strategy for other-than-monthly expenses within your spending and savings plan.
First, it is helpful to identify the non-monthly expenses that might be missing from your spending plan. Vacations and gifts (holidays, anniversaries, and birthdays) are two of the largest other-than-monthly categories. Other expenses like sports/summer camps, lawn care, and charitable giving might be categorized as seasonal, non-monthly expenses. When left off the budget or spending plan, even the more minor expenses like annual car registration or insurance, haircuts, Amazon Prime Membership, oil changes, etc., can start to add up. Take a minute to think about your non-monthly expenses and identify ones that your spending plan may be missing.
One of the simplest ways of planning for large expenses is a relatively hands-off approach. This method simply requires maintaining a decent buffer in your regular, everyday checking account. Often, the checking accounts of doctors and dentists fluctuate rather significantly throughout the month depending on when their paycheck is deposited and when debits (mortgage payments, etc.) are withdrawn. This method addresses big expenses by maintaining a surplus in the checking account (Ex., one year's worth of non-monthly expenses) to ensure there is money set aside for those non-monthly expenses. If your checking account doesn't drop close to $0 at any point during a "normal" month but always maintains a health buffer, a non-monthly expense should not cause too much stress.
A common question when this method is proposed is to wonder how to rebuild the buffer once a non-monthly expense depletes it? This method is based on the premise that a household's inflows are greater than their outflows in a "regular" month (one without a large non-monthly expense). In this case, the checking account buffer would grow during the months when a non-monthly expense does not occur. So, if the lowest the checking account ever reaches is $10,000, typically, the next month, it will be greater, which means you are building the buffer for the next significant expense.
The other method for saving for big purchases is slightly more hands-on. We call it the OTM or Other-Than-Monthly account. In this method, a physician or dentist will set up a dedicated checking account separate from their regular, everyday checking account. The new account will be used to "escrow" for non-monthly expenses just like a mortgage escrow account builds money on a monthly basis to pay annual property taxes and homeowners insurance premiums. Like the last method, the key is to start the OTM account with enough seed capital to prepare for a non-monthly expense should one come before you've had enough time to escrow monthly. Often this seed capital can come from a bonus or true-up, or buffer you already have in your checking account.
An automatic monthly transfer from your everyday checking account to the OTM account allows you to build enough in your OTM account to cover significant non-monthly expenses like plane tickets or holiday gifts. Once the big expense is incurred, a simple transfer from the OTM account back to your everyday checking account will ensure that you do not deplete your regular checking account below your comfort level. One key to this method is deciding how much to transfer into your OTM account each month. Then, by determining which spending categories you'd like to escrow for (travel, gifts, etc.), you can select the target for your OTM escrow. Ultimately, your OTM account can act as a backup emergency fund.
Having a plan for your monthly cash flow is vital to reaching your financial goals and having a healthy relationship with your money. Large, non-monthly expenses can wreak havoc on even the most sound spending plan. Using one of the methods we have outlined can be a good place to start. If you need help with your budget, instituting one of the strategies outlined in this blog, or anything else personal finance-related, the team at SDT is here to help!
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
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