When it comes to budgeting, categorization is the name of the game. If you’re doing great with 95% of your spending but that other 5% is completely obliterating your savings rate, then a self-examination needs to occur. There’s obviously no better remedy for that than setting a monthly budget. But one particular line item in your budget can throw everything off and that is the dreaded Miscellaneous category.
When I first got serious about budgeting, I initially thought I could just focus on the easy stuff that really stuck out such as rent, utilities, my car, my phone, cable, internet, food and my student loan.
Then it dawned on me that it wouldn’t be that simple. There were other ‘annoying’ expenses that I simply couldn’t leave out of the mix like buying clothes, going golfing, withdrawing cash, going out to bars, going to the movies, buying a bike, buying a laptop, buying a TV, traveling, car maintenance, gifts, concerts, recreational leagues, professional sporting events, etc. I wanted so badly to put each of these in their own category but then soon realized that would have been way too cumbersome and self-defeating.
Yet at the same time, lumping them altogether as ‘miscellaneous’ would’ve also hampered my ability to identify certain buying trends on which I could possibly scale back.
So to strike that balance, I needed a more methodical way to budget all these things. There’s no neat order to this but here are the main four steps to get you on the right track:
1) Regular vs Irregular Expenses
First what exactly constitutes as miscellaneous? To me, I define it as small irregular purchases. Regular purchases, whether large or small, are the easy ones to budget (rent/mortgage, car, phone, cable, etc). As for small irregular purchases, you’ve got your basic examples such as clothes, oil changes, recreational events/leagues, movies, concerts, a zillion accessories and, well, a lot of other stuff. Essentially anything under $100 but this to me is more of an arbitrary barometer than a hard-lined rule.
As for what can be excluded, let’s set aside traveling or buying a fancy electronic devices like a laptop or a TV for now. While they may be irregular purchases, they certainly don’t qualify as small.
And let’s also set aside dining out. While they may be small purchases not usually done on any fixed schedule (although that may be something to consider), they’re often regular enough to be in their own category.
2) Figure Out Any Seasonal Expenses
Next you might want to consider if you buy certain stuff or experiences more on a seasonal basis which kinda blurs that line between regular and irregular expenses. For me, this would be golf. Since I live in the frozen tundra known as Buffalo, I can only golf around 4-5 months a year. So when the summer hits, my week-to-week spending for miscellaneous tends to go up above my average. Conversely, when it’s winter, I try to keep my spending below average as my winter hobbies tend to be less costly.
3) Set Your Strategy For Lump Sum Expenses
Now that we’ve tackled small irregular purchases, what about large irregular purchases like traveling, getting new appliances, buying a laptop or getting new tires for your car? For these big ticket items, I like to put these into their own category which I like to call Lump Sum purchases. As the name suggests, these are usually purchases that you normally don’t split out in any way even though the cost might be pretty exorbitant.
They way I like to view these items is more through a yearly budget lens and not so much through a monthly budget one. So what I’ll do at the start of each year is think about any such large purchases and rank them based on desire/need. Next I’ll tally up the cost and compare it to the Lump Sum credits I hope to receive for the year. This could be your tax return or a bonus from work or some other relatively large sum of money outside your regular job. If I find that my lump sum expenses match up pretty well together, then I pretty much cancel them out and my savings rate is safely intact. However, if you’re not expecting any such credits or the remainder of the difference is rather sizable, then I would suggest to add that new refrigerator or iPad or whatever it may be as a special ad hoc category for the year as a monthly expense. That way you’re staying focused on a particular item and keeping the miscellaneous category rather clean.
4) Average Out Your ‘True’ Miscellaneous Expenses
Now that we’ve defined miscellaneous as small irregular purchases, take the time to go through everything you’ve bought in at least the past 6 months to find out what your average is of these purchases. By doing this, you’ll set a barometer for your average monthly miscellaneous expenses. If you find it to be taking up a large part of your expenses, then go through steps 1-3 again to find any patterns that might constitute as regular expenses. Maybe you found yourself buying more clothes or makeup or going to the movies more than you originally thought to the point where you want to add it as its own line item. When you do that, then you can focus more on how to cut costs there to the point where it can be absorbed once again as a miscellaneous expense.
So what are your thoughts on budgeting for miscellaneous expenses? What’s your plan of attack? Leave a comment below!