Budgeting for a Big Expense
Some expenses come once or twice in a year, and many have a way of sneaking in when they’re not expected. Significant expenses such as a car repair or house renovation may break the bank, hence the reason one needs to plan and budget for these types of costs. Significant expenses fall under three categories which include emergencies, annual costs such as vacations and holidays, and one-off expenditures such as downpayment for a house or car repairs. Read through some points to help you during your budgeting process.
Planning is vital when budgeting for a significant expense. One should ensure that at the start of every year, they list down all the big recurring expenses such as vacations or car insurance, especially if you pay the premiums after six or 12 months. By dividing the amount, you are expected to pay by the remaining days to the due date; you can know how much to save each month to cover the expenses. For example, if you spend €1200 on car insurance premiums every six months, then you should stash 200 at the end of each month.
Use a High Rate Savings Account
If budgeting for a big expense, consider opening a separate saving account for the intended project. This will help you manage your finances and track your progress. A savings account will also reduce the chances of spending finances on other expenses. It’s important to remember that savings accounts have different features and terms. For this kind of expense, consider the high rate savings account, which will help you reach your goal quicker because the money will earn interest depending on the rate and duration.
Don’t Forget The Emergency Funds
When saving for a big expense, people often forget that this is not part of the emergency funds. Even when saving money for the big expenditure continue funding the “Emergency Account” to avoid draining money from the savings account when unexpected emergencies such as vehicle or roof repairs arise. Don’t fall into the trap of “borrowing” from the emergency fund to settle expenses that should have been budgeted for such as a vacation or evening out. If you fall into this trap, you may find yourself in real financial difficulty when an emergency occurs.
Automate Your Savings
Also referred to as the “set-it-forget-it” approach, automated saving helps reach your saving goal within the time allotted because savings are made automatically from your bank account or by the employer before the salary is credited to your account. Once you have calculated how much you need to save each month, talk to your employer or bank about these deductions from your current account or salary.