How to budget for one off expenses
How do I use Budgets GetReal for once off expenses e.g. car repairs?
This may seem a simple question. In reality it raises a series of questions as to what exactly can and should be included in a budget, and how items such as this are handled.
The basic principle to creating a budget in Budgets GetReal, or any other budgeting or accounting program, is this:
If you are certain that an income or expense will definitely occur then you should enter it within your budget PROVIDED you can relatively accurately predict the cost and when it will occur.
Otherwise you should treat it as an contingency that could occur at any time that may need to be paid from your savings or cash reserves.
Example: The battery in your car
The principle can be illustrated by considering a simple example like replacing the battery in your car. There are two cases:
Allow the battery to fail and budget for the breakdown
From past experience you know that a battery generally lasts for around 3 years, and most likely will fail in winter when the loads on them are greatest. You can also take a reasonable guess as to its replacement cost. Nevertheless, from a budgeting perspective you should not add this into your budgets.
1. If you add it as a budget item and take a guess when it will occur, your cashflow will be incorrect. You will have to then continually remove it from one months budget and add it to another until it eventually occurs.
2. The expense may never occur e.g. you may have sold the car before you needed to replace the battery.
Preventative maintenance
The only way you would decide to add this item to your budget is if you decide to replace the battery at the start of winter to avoid the cost and inconvenience of a breakdown. In this case you have a firm date and an approximate price. You can enter this expense as a one-off item. Furthermore Budgets GetReal can issue you a budget reminder to get the battery replaced, say, one month before it is due.
The above image shows what your one-off budget item may look like. Note that you will get a reminder 30 days before you want the work done. You have entered it as a specific bill because Bob Jones Auto always does this work for you. You have selected a “Remind + then you pay” option so that the item is flagged and reminds you in case you don’t get the work done.
So I can’t add an unexpected expense to my budget. What do I do ?
The way to look at these unscheduled, one-off expenses is establish ways to deal with them. Some possible ways (by no means an extensive list) are:
1. Adequate savings and cash reserves. The great thing about credit cards is that you can use them to immediately pay these expenses provided you have adequate funds left on your cards.
2. Insurances
3. Minimising the risks by preventative maintenance etc. This is the example shown above.
Budgets GetReal provides two powerful methods to help you with understanding your savings & reserves. These are the Cash Curve and the Future Provisions extension. The Cash Curve is fully described elsewhere. We will discuss how the Future Provisions extension can help you here.
The concept of reserves is simple. If you have access to sufficient savings or affordable credit when a significant unforeseen expense occurs you won’t have a problem. In this case you have adequate reserves to get through. If you don’t have these reserves then you are not going to be able to afford something else, or you may have to sell something or take out a loan to get through.
In this regard we are talking about “cash reserves” – cash in bank accounts, unspent balance on credit cards, available balance on a home loan etc. Assets like property and shares are usually no use to you in this sort of situation – you may not want to sell them or be able to sell them at a reasonable price in the current circumstances.
Future Provisions example
To open the Future Provisions extension select it from the Extensions section of the main sidebar menu. Simply add your best guesses of the likely expenses and when these will occur like in the following example.
The advantage of using Future Provisions is that they are automatically added to your Cash Curve without you having to add them to your budget. This allows you to see where in the next 24 months you may have a crisis in liquidity. If this is the case you will need to review your finances as outlined in the documentation for The Cash Curve .
You can also use the Graph facility to see the monthly requirements of all Future Provisions.
