Planning for the expenses that arrive once a year
The usual way is to add up every bill that arrives once a year, divide by 12, and set that amount aside each month. Each bill is then paid from money that is already waiting, and a year of insurance, car tax, and servicing that comes to 840 becomes 70 a month.
The simple sum leaves one thing out. In the first year, the bills do not wait for the pot to fill.
Find every bill that comes once a year
Yearly bills are easy to forget because they are rare. Go back through 12 months of bank and card statements, and list every payment that appeared once, or twice at most. The usual ones:
- The car: insurance, car tax, breakdown cover, the service, and the annual test.
- The home: home insurance, the boiler service, and a chimney or gutter clean.
- Memberships paid yearly: a gym, a professional body, or a renewal for software or a website.
- Health: the dentist, new glasses, and anything a pet needs once a year.
Then add the costs that are not bills but come on a date you know: birthdays, and the holidays in December. They are as predictable as the insurance, and they land just as hard.
The sum: 840 becomes 70
Here is a household with 4 yearly bills:
| Bill | Each year | Each month |
|---|---|---|
| Car insurance | 480 | 40.00 |
| Car tax | 195 | 16.25 |
| Breakdown cover | 85 | 7.08 |
| Boiler service | 80 | 6.67 |
| Total | 840 | 70.00 |
Divide each bill by 12, or the total: 840 divided by 12 is 70. Set 70 aside every month, and over a year the pot collects exactly what the bills cost. Each bill finds its money waiting, and no month takes a hit of 480.
The first year is short
The 70 assumes 12 months of saving before every bill. In the first year, that is not how the dates fall. The bills arrive on their own days, and the pot has only been filling since you started.
Say you start in November, with 70 going in on the 1st of each month. The car insurance is due in January, the car tax in March, the breakdown cover in June, and the boiler service in September:
| Bill | From the pot | From elsewhere |
|---|---|---|
| Car insurance, 480, in January | 210 | 270 |
| Car tax, 195, in March | 140 | 55 |
| Breakdown cover, 85, in June | 85 | 0 |
| Boiler service, 80, in September | 80 | 0 |
In January, 3 payments of 70 have gone in, 210, against a bill of 480. In March, 2 more have gone in since, 140, against 195. By June the pot has caught up, and by the end of October it holds 325.
So the first year needs 325 from somewhere else. By the end of October, the pot holds 325, the same amount. That balance is what lets 70 a month cover every bill on time from the second year on, if the bills stay the same. It is a tight fit: in this example the pot touches 0 once a year, just after the car tax in March, and never goes below it.
Ways through the first year
There are 3 ways to cover the gap, and each asks for something different.
- Put the gap in at the start. Here that is 325, once, from money you already have. After that, 70 a month is enough.
- Pay this year's bills the way you paid last year's, and start each bill's share the month after it is paid. The insurance's 40 a month starts in February, the car tax's 16.25 in April, and so on. The pot reaches the full 70 a month by October, and no bill ever finds it short. It keeps last year's arrangement, whatever it was, for one more round.
- Pay monthly where the provider allows it. Some insurers spread the cost over 12 payments, but that can come with a charge for the credit. Compare the 12 payments with the yearly price before you count it as a way through.
To work out your own gap, take each bill in the order it falls due. Compare what will have gone into the pot by then with what the bills due so far have cost. The largest shortfall along the way is the gap.
Where the money waits
Where the 70 sits changes what your balance shows. In your everyday account, it counts as money you can spend. In a separate savings account, or a savings goal in a budgeting app, it does not.
In Skarb, a savings goal holds money out of your spendable balance without turning it into a transaction, so the 70 a month never shows up as spending. If the workspace keeps balances, adding to the goal takes the money from one of them. When a bill is due, take its amount back out and record the bill as an expense, in the month it is paid.
When a renewal comes in higher
Renewals often rise. When the car insurance renews at 540 instead of 480, its monthly share goes from 40 to 45. Add the 5 a month from the month the renewal notice arrives.
The year of the change still comes up to 60 short, because most of the insurance's share went in at 40. The gap shows on whichever bill falls due next while the pot is low. It is the first-year gap again, in miniature, and the same 3 ways cover it.
What to do on Monday
- Go through 12 months of statements, and list every payment that came once or twice.
- Add them up, and divide by 12.
- Work out your first-year gap, bill by bill, in the order they fall due.
- Write down the monthly amount, the gap, and what each way through it would ask of you.