Standardized Expense Categories

If you don’t use standardized expense categories in conjunction with your expense gathering device, you’re just pretending to live on a budget. All periodic expenses and maybe some variable ones too need to be standardized. It’s the only way you can truly end up with an accurate budget.

Periodic Expenses

If only all your bills were monthly, right? Things would be so much easier. Some of your bills are due yearly, quarterly, bi-yearly, or whatever. I’m proposing you convert all your periodic expenses to monthly expenses. Do it for all your periodic bills, whether it’s a creditor or vendor you’re paying.

Some vendors will offer to do a version of this for you, but the one’s I’ve seen charge you for the service. For example, an auto insurance provider offers monthly payments instead of bi-yearly ones, or a mortgage company offers (or requires) your property tax payments to be standardized along with your mortgage payment and property tax.

I recommend you use standardized expense categories for all your periodic expenses and do the standardizing yourself. It’s not hard. For example, take that auto insurance provider who bills you twice a year: Add those two bills together and divide by twelve. That’s the fixed monthly allotment that’s a part of every month’s budget. In the 10 months the insurance bill isn’t due, set that standardized amount aside for safekeeping until the due date.

Variable Expenses

If the variance isn’t great, variable expenses can be left alone and not standardized. Those that vary greatly during the year, like heating and cooling costs as an example, should be standardized. Add up last year’s bills. Just to be on the safe side, add 5% or a more appropriate percentage to the total and then divide by twelve. Save that amount every month.

Once again, your vendor may offer to do the standardization for you, but more than likely they consider it a service and charge you extra for it. For example, your electric company might offer you—for a fee—a fixed monthly payment throughout the year based on last year’s usage, with a “true up” at the end of the year. Better to do it yourself.

Stashing Surplus Money

When saving for a periodic or variable expense category and it’s a month when the bill isn’t due or there is an overage, make sure you don’t accidently spend that money on something else other than the expense it’s meant for. Decide where to stash that extra cash. Transfer it to an interest-bearing account or a free checking account for safekeeping. Or keep it where it’s at and isolate it virtually with your app.

Tracking Expenses

Once you’re done and have standardized expense categories for all your expenses, every month’s budget looks the same. As a bonus, you’ll find keeping track of your expenses in your chosen expense data gathering device is suddenly much easier.

Most importantly, now, maybe for the first time, when you have money left over at the end of the month you really are under budget. Go out and treat yourself knowing there are no periodic or variable expenses lurking around the corner.

Jump-Start Your Standardized Expenses

Depending on when your periodic and variable bills are due, as well as which season you start your standardization, you could be short a buck or two and not have the money to pay a periodic or variable bill. You may need to “jump-start” some categories depending on the circumstances.

For example, say you start your budget in January and you have a yearly property tax bill of $5,000, with $2,500 payments due April 1st and December 1st. After standardizing your property tax payment initially into monthly amounts of $416.67, you’d be short $1,250 come April 1st. You’d need to jump-start your standardized property tax category with an extra $1,250.

Take this into consideration when setting up your initial budget. After the first year, if not sooner, everything evens out and no future jump-starting is necessary. Just be sure to transfer those held but not yet spent standardized amounts from one year to the next in your expense gathering device.

In the above example, 8 months of monthly savings would be accrued by the second due date of December 1st, which is more than needed to pay the bill. Pay the $1,250 December 1st property tax bill and save the overage of $833 and change in your account. Be sure and note this carry forward, which will be used to help pay next April 1st’s property tax bill, in your expense gathering device.

Standardized Expense Categories

Hopefully, you see the light and understand the importance of standardizing periodic and some variable expenses. Using standardized expenses in conjunction with your expense gathering device is the only way to know if you’re staying on budget, and it assures you have enough money to pay those bigger periodic and variable bills.