You will be able to explain how irregular costs push a balanced monthly budget into debt or drain savings.
A monthly budget can balance every month and still fail, because it can't see past the end of the month. Some of the biggest costs in your year arrive in lumps rather than monthly, and they need their own line in your budget.
Wei Ling has just started a new budget, and in January it works. She keeps her eating out under S$420 and cuts back on delivery. Like every amount in this course, that figure is made up for the example. On the last day of January she has S$630 of "future you money" sitting in savings.
In February, Lunar New Year arrives. She gives red packets to her nieces, nephews and parents and buys new clothes. She also puts money towards the reunion dinner and takes several Grab rides across the island between relatives. The total comes to S$880. Her budget has no line for any of it, so she moves most of January's S$630 back out of savings and puts the rest on her credit card. One week of festive spending has undone a month of careful budgeting and left her with a credit card balance.
Wei Ling's festival spending is one kind of irregular cost: a cost that comes once a year or a few times a year rather than every month. These are some of the common ones:
insurance premiums you pay annually instead of monthly a credit card annual fee, if it isn't waived yearly renewals for software, cloud storage or a gym membership road tax and car insurance, if you drive birthdays, weddings and baby showers travel festive seasons
In any single month most of these don't appear, so your monthly budget looks fine. Over a year, though, they can add up to more than a month's take-home pay.
When a lump-sum cost arrives and you have nothing set aside, you pay it from one of two places: your savings or a credit card.
Paying from savings feels responsible. It means the month's saving was never real saving, though. The money was only parked for a short time and was always going to be spent. Say someone saves S$600 a month and takes out S$600 every second month for irregular costs. Over a year, they have saved half of what they think they have.
Paying by credit card is worse. If you don't clear the full balance by the due date, interest starts on the purchase. Leave a S$500 bill on the card for a few months at card interest and it ends up costing noticeably more than S$500. The card debt then becomes a debt payment that competes with next month's budget, which makes it more likely that the next irregular cost goes on the card too.
Either way, the month's progress is undone. Many people then decide that budgeting doesn't work for them. In fact the budget was just missing a line.
In Singapore, festive seasons are among the largest irregular costs. Which ones apply to you depends on what you celebrate. Lunar New Year brings red packets, new clothes, gifts for hosts and rides between relatives. Hari Raya Puasa brings green packets, new baju kurung or baju melayu, and open-house visits. Deepavali often means new clothes, sweets and decorating the home. Christmas usually means presents and a meal out.
Many people mark more than one festival with friends and colleagues, so these costs stack up across the year. The costs also go beyond festival days. A wedding season, a year-end family trip or a cluster of birthdays in one month can cost as much as a festival.
You can predict irregular costs even when you can't predict the exact amount. Wei Ling doesn't know exactly what next Lunar New Year will cost, but she knows which month it falls in, and she can use last year's S$880 as a guide. A plan built on a fair estimate is better than having no budget line at all.
Most irregular costs give you advance warning. Renewal dates are printed on your insurance policies, and wedding invitations arrive months ahead. If your phone is three years old, it will need replacing soon, even if you don't know the exact month. For each cost like this, estimate the amount from when it falls and what it cost last year, then give it a line in your budget.
These foreseeable costs are part of normal life and belong in your budget. Keep your emergency fund for things nobody could have predicted.
Start by finding them. Look back through the last twelve months, as far as you can remember and as far back as your statements go, and list every cost that wasn't part of a normal month. The festive seasons are the obvious place to start.
List every lump-sum cost you paid in the last twelve months that was not part of your normal monthly spending.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).