Stop Denying, Start Saving to Cope With Infrequent Expenses

When it comes to budgeting for infrequent expenses, many people live in a state of denial.

For example, it's reasonable to expect that a car eventually will need new tires, a tooth will require a filling, or a household appliance will need repair or replacement. Yet many consumers prefer to pretend that nothing will go wrong.

It's easy to overlook the need to budget for infrequent expenses because they fall outside the typical cycle of expected weekly, monthly, quarterly, or even annual expenditures, according to Connie Kilmark, financial counselor and consultant and the owner of Kilmark and Associates, LLC, Madison, Wis.

Stay in orbit

Kilmark compares the cycle of expenses to the orbit of planets around the sun. While it may take years, eventually an infrequent expense will come around again.

"These are not unexpected expenses, just very infrequent, at least by the standards of a busy family ... too caught up in the day-to-day chaos of everyday living to stretch ahead to one year, never mind five years, seven years, or 10 years," Kilmark says.

The reality is that even relatively rare expenses can be budget busters unless you save in advance.

"As soon as you buy a car, the next one is on its way, even though it might be in another galaxy far, far away," Kilmark says. "So is the next refrigerator, so is the next stove."

Fix your budget

To begin building infrequent expenses into your budget, Kilmark advises taking a tour of your home's interior. Compare the age and condition of your appliances to their average cycle by consulting the This Old House Web site and searching for "How Long Stuff Lasts."

If you own your home, budget for maintenance and repairs, paying special attention to future major projects, like a new roof. In general, homeowners should set aside at least 2% of the value of the property for repairs and maintenance each year.

Next, step outside your home. If you own a car, Kilmark recommends a car repair fund of at least $600 a year. Another option is saving for repairs based on vehicle mileage, budgeting $25 a month for a new car; $50 a month for a vehicle with 30,000 to 60,000 miles; $75 a month for 60,000 to 100,000 miles; and $100 a month if the odometer tops 100,000.

Finally, consider personal expenses that may not be covered by insurance or other funds. If you don't have dental insurance, for example, budget for at least two cleanings a year, plus an additional amount to cover repairs.

Break it down

Once you identify the infrequent expenses facing your household, it's time to come up with a savings plan.

Kilmark recommends creating a grid, with infrequent expenses listed on the left side and columns for annual and monthly budget amounts across the top.

A sample grid is shown below for a 24-year-old woman named Amy living on her own in a rented apartment. Amy owns a five-year-old car with 103,000 miles. She believes she can use it for two more years, as long as she buys new tires next year. In the meantime, she's saving for her next car.

Amy has health insurance, but no coverage for dental care or replacement of her glasses. While most appliances are provided with her apartment, Amy has a hand-me-down TV that probably needs replacement soon. She claims she cannot live without her iPod and her laptop, so she has built those into her plan as well under the category of "other electronics."

Kilmark notes that it's possible but unlikely that Amy would need to address all these needs at one time. Budgeting in advance for all of them helps balance higher-than-expected expenses in one category with below-budget expenses in another. If Amy saves more than she needs, she can meet other goals, like increasing the down payment on her car or saving for retirement.

Amy's Infrequent Expense Savings Plan

All amounts are estimates only; check actual costs in your area when setting your budget.

If you look at this grid and think it's impossible to save that much each month, recognize your reaction for the wakeup call it is: When you ignore inevitable but occasional expenses, you never will be prepared to meet them.

Save what you can until you build a stronger backup fund to meet these and other now-and-then expenses. One effective strategy�as soon as you pay off a loan, divert that monthly payment to your savings or money market account.

Stay focused

Credit counselor Nenda Burchfield often talks with members of Crossett Paper Mills Employees Federal Credit Union in Crossett, Ark., about the importance of saving for infrequent expenses.

Unfortunately, Burchfield says members often lose focus and take money out of savings to spend on unrelated items that are wants, rather than needs.

"Instead of saving the money and holding on to it, they give in when their children want something and use the money to pay for it," Burchfield says. "Then the money isn't there when they need to repair the washing machine or get new tires for the vehicle."

Burchfield says some people believe they cannot afford to save for infrequent expenses because there is little money left after necessities are covered.

In those situations, Burchfield encourages people to look for ways to capture amounts that can be turned into regular savings deposits. That might mean pausing every evening to empty your pockets into a jar designated for savings or "rounding up" the amount of checks written to the next higher dollar figure when entering them into the check register. At the end of the month when you balance the checkbook, figure the difference between actual spending and the register and transfer that amount to savings.

Another option is clipping coupons and tracking the amount saved on the sales slip, and then depositing that amount in a savings account.

With all three approaches, Burchfield recommends getting the entire family involved by tracking the amount placed in savings and looking for more ways to cut costs. Parents can make it fun by offering to do a special favor for the child who contributes the most to the family's saving effort for the month.

Avoid the worst

Burchfield says many people learn the value of saving for infrequent expenses only when things go wrong. She recently worked with an elderly man on a small fixed income who believed he couldn't afford to save for car repairs.

When his car broke down, he faced the possibility of losing not only his vehicle, but his independence as well.

Fortunately, the credit union was able to work with the man to refinance his vehicle loan so he could afford the repairs. Now he's trying to save small amounts for future needs.

"If people would only get a handle on these kinds of expenses in advance, they'd be good to go," Burchfield says.

Published May 5, 2008