How do you account for large infrequent expenses?

[Cobra9777]

I have a separate account called "One-Shots." Any large expenditure that occurs less frequently than yearly goes into that account. The 10-year historical average from this account is $15K/yr, and that figure is included in the annual expense budget that must be covered from pensions, withdrawals, etc. That figure is probably too big, as the last 10 years included such things as used cars for teenage kids and some rather large home improvements when we bought the current house. Those won't all repeat, but we assume that some new forms of unexpected spending will crop up, like taking care of aging parents. So it provides a reasonable baseline estimate.

I don't actually set money aside in a separate account, as that seems like an unnecessary complication. And yes, I include all such expenditures in the annual expense numbers. However, I sort-of track it separately from basic living expenses, along with income tax and travel. Basic living expenses are relatively stable. Taxes, travel, and "one-shots" are all over the map.

 

[Independent]

When I planned for retirement, I figured we'd buy a new car costing about $X every Y years. I put $X/Y into my planned annual spending.

We've kept accurate spending records for many years. I could go back and get the large household expenses (new roof, fridge, furnace, sidewalk, garage door, etc) over a period of maybe 10 years. I used the average of those.

I knew we had a couple kids still in college. I reduced our beginning asset by the amount I expected to spend on that. Did the same for a couple other big expenses.

If we had been planning for a big home addition, like a four-season room, I would have handled it as a reduction from assets.

 

[Live And Learn]

I have a separate account called "One-Shots." Any large expenditure that occurs less frequently than yearly goes into that account. .

I have separate accounts in my spending data also. One for "one time home maintenance" (roof, hot water heater, HVAC, etc) and another for "one time other" (Cars, TV, PC, mattress). In addition to these I have "regular home maintenance" (all the little things that need fixing / replacing) and "ongoing purchases" (electronics other than TV and PC, home decor, etc).

 

[ksr]

I include an amount for reasonable/expected annual maintenance in my budget: about $2K for home repairs and $1K for car. I can pretty much count on needing to spend money on some kind of home repair each year - that could be anything from a new appliance to a tree removal. In my budget I also include $5K per year as "slush"; inevitably something unexpected and largish pops up in one of my categories (could be dental, vet, bigger home repair, etc.). So far I haven't had to tap the slush money, but I know some year is going to use it all up and then some.

A few years ago I started feeling that this wasn't quite adequate, so I also started funding a separate Emergency Fund. I don't include the value of the Emergency Fund when calculating annual WR. I add any excess or unspent $ from my budget at the end of the year to the Emergency Fund. Any really large one-time expense will come from there, and I will replenish (hopefully) in future years.

 

[Alan]

Before we retired we used to have a car fund set up and put money in there every month, plus a slush fund for vacations and other stuff that might come up. Now that we are retired big purchases, such as the car we just bought, just get treated as an expense and I just live with the ups and downs from year to year.

 

[FUEGO]

What I've done (and it seems pretty common), is to put all upcoming large, infrequent expenses in a spreadsheet. Put in the year, and the amount, and how long it should be before repeating. Amortize each across those years.

Examples: new roof, painting the house, major appliances, cars, remodeling, etc.

+1 That's how I do it. $1500 per year covers routine replacement of small items (like a new washer or dryer) and big items (new roof, new siding, new windows). So far so good. We had a lumpy 2014 with $8,700 for new siding and windows and a major roof repair. Instead of $32,000 spending, we came in at $34,500. We saved money elsewhere and didn't buy a new(er) car in 2014. It all kind of averages out.

The car replacement fund goes the same way. I plan on something like buying a new used car every seven years for $10k and selling the old car for $3k, thereby ending up with a $1000 per year "car replacement expense".

In practice, this type of expense planning means we'll spend less than our target amount in most years with the occasional year of higher (or much higher) than average spending.

 

[mpeirce]

I have a fairly large grained budget. One of the large categories is "reserve". This is 7%-8% of our yearly spending and it's used for unforeseen largish items that come up.

For example, 2014 reserve spending included a new sliding door for the house, a new set of tires for the car (after a blowout), some exceptional vet bills, and a very nice chair for my den. I had set aside 7% for these reserves and spent about ¾ of that. The rest just stayed unspent.

For really large items like new homes and such, I'd not consider that a budget item, but rather a redeployment of assets.

 

[freebird5825]

I, too, have a separate account (worth $40k, like yours) like a slush/capital fund I use for very large expenses. It is in addition to my emergency fund although money is fungible so I kinda consider the two alike. It is in another muni bond fund so it is simply part of the bond portion of my overall portfolio.

I do same, i.e. keep a nice big stash in a national muni bond fund. If I cannot cover a very large expense through my normal liquid cash accounts, then I can always write a check against the fund. In the meantime, it grows nicely, no taxes on the 30 day dividends, compounding, compounding...

I treat this as a regular member of my overall retirement portfolio when I consider AA and returns.

 

[jkern]

This subject has come up before, so apologies for repeating myself.

I also show all expenses in the year they occur, BUT we have all the large infrequent/unpredictable expenses budgeted under a category called "accruals." We track variances for each category in our budget, that could be somewhat meaningless if we did not have accrual categories.

Some examples we consider accrual items are car purchases (predictable) or HVAC/roof/appliance/furniture replacements. Since I have some idea how much and how often these expenses hit, I've built a spreadsheet projecting those expenses for the next 35 years (inflation adjusted), and I "budget" for the average from those projections each year. Yes, it's irregular most years but the average will hopefully be reasonably close. So our category variances are all meaningful, and we've budgeted for the unexpected to the best of my ability.

Our accrual average is (round numbers) $10K/yr, and all our other expenses (without healthcare) are about $45K/yr - IOW "accruals" are significant, and should be included in budgeting somehow.

My 2 cents...

And I thought I was the only one who took budgeting this far. It's nice to know I'm not alone.

 

[kimcdougc]

Since DH just joined me in retirement last week. I accrue so much per month and transfer it to another account. On a spreadsheet I have the amount I save every month into that account disbursed between several categories. Example, Cars - $200, house maintenance - $200 per month, Travel - $500 per month and so on. I keep a running balance on the spread sheet to how much is in each category. If I make a purchase or use some of the money I add or subject from that category what was used.



Hope it works as this is new for me. We have pretty new cars, so I hope by the time we need to purchase another one we will have accrued enough to pay cash for the car etc. We also have a large emergency fund if needed.

 

[Floridatennisplayer]

Wow, spread sheets, tracking expenses. How do you report it??

The first question I was thinking was.....report it to whom?

Just write a check.

My expenses are pretty much the same year after year. Cell phone, utilities, cable bill, property taxes. Throw in a wedding or graduation here and there. Why do i need to write all this stuff down every month? I've got more fun things to do than do a spreadsheet monthly that is pretty much identical to last months, and the month before, and the month before.

 

[bingybear]

large expense... just call it a round off error.... and tell the better half that. If that works... you're golden