Don’t forget variable expenses when creating your spending plan

Every so often, I stop and take stock of my financial situation by double-checking where my money is going. I don’t have an exact spending plan down on paper; my style involves making sure all the important stuff (mortgage payments, pension contributions, insurance, emergency fund, groceries, bills, etc.) is covered, and then I pretty much spend until the rest of the money is gone for the month.

But that doesn’t mean I don’t review my expenses occasionally. I also look at my spending and decide whether or not I could increase certain contributions. If I’m going to do this, it means that I need to re-evaluate my monthly income and spending, and make sure I have the resources available to change things up a bit. Recently, I wanted to bring my pension contributions up to the max, so I had to look at what was happening with my spending.

Upon first review, I thought everything was great. But, when my new, higher contribution came out of the account the following month, I was dismayed that there didn’t seem to be quite as much left over as I thought there should be. The culprit? A variable expense.

Don’t forget variable expenses

We all have variable expenses. Rather than being fixed, like your car payment, the cost of variable expenses changes each month. This can be the variation in what you spend on groceries, as well as the items that you only pay periodically. In my case, the variable expense I forgot to plan for was an insurance premium payment automatically deducted from my bank account once a year.

When you’re planning your budget, it’s important to account for these variable expenses. Look back through the last three to six months’ worth of spending in order to get an idea of where you are. If last month’s electric bill was the lowest in the year, you don’t want to base your spending plan off that less-than-typical number. Instead, add up what you spent on electricity over the last six months and then average it out. That will give you a far more accurate estimate of what you pay regularly for your utilities.

Don’t forget periodic expenses, either. Many insurance policies bill every six months, or every year, rather than monthly. Make sure you account for that by looking back through your spending. You can check your bank account or use personal finance software to help you keep track of where the money is going and how regular the expenses are.

As you put together your spending plan/budget, don’t forget about the variable expenses. It’s tempting to just look at your last month of income and expenses, but it’s rarely enough to give you a true idea of your financial picture. By checking back through three to six months of expenses and making a list of all your periodic expenses, you can more effectively plan your financial future.