One of the most overlooked components of a budget is the lump sum payment. The lump sum payment comes in many forms, whether it be annual registration for your automobiles, annual membership dues, quarterly tax payments, or anything that you can expect to repeatedly spend on a periodic basis that exceeds a single month.
Since we don’t write that check but once per year for most of these items, we neglect to place them in our monthly calculations and then we fall into a common trap of using credit cards to cover those expenses when they arise simply because we “forgot” about them.
The problem with that practice is that you end up amortizing your lump sum payments, accounting for them monthly with your credit card payments anyway, only with interest, so they end up costing you more than they should after the fact.
Christmas is a perfect example. I used to find myself nearing Christmas Eve with no idea regarding what I would purchase, for whom it would be, nor how much it would be. What I knew was that in a pinch, I could easily charge it up and get it out of the way, then worry about it later.
This is a nasty way to spend the first half of each new year, and it sours the taste of giving as you continue to write checks for Christmas gifts that are 5 months old.
A Strategy for Handling Lump Sum Payments
This is so simple you should slap yourself for not doing it. I’ll re-iterate one particular point…if you aren’t writing a monthly budget, there’s no point in paying attention to the rest of this information. This strategy is for those who have successfully practiced a few months of budget planning who have suddenly run into a lump sum payment they had forgotten about that they weren’t sure how to handle.
Here’s how to handle it. I’ll use auto registration as an example. Every year you’re going to register your car and every year you know that the fee will be less than the prior year. That’s good news. To make certain you plan ahead, take the previous year’s registration fee and divide it by 12. Add that expense to a line on your monthly budget. That’s it.
See? I told you it was simple. Now you know what it costs you per month to register your car.
What about all of the other lump sum payments? After all, not everything is due at the same time, and dividing by 12 may not work this month because the payment is due in 3 months.
Well, this solution I’ve found works well for me. I have added up all of my annual fees based on what’s happened in the past and padded it a bit for unexpected annual “gotchas” of the non-emergency type. I then created a new savings account at my online bank and I called it Annual Dues Account ( most of mine are called annual dues, but you could call it “lump sum account.”) I took the total amount of the lump sum payment and divided it by 12 to get my “monthly burden” so to speak, then created an auto transfer in that amount from my personal checking account to that lump sum savings account. Every month my reserve account gets a small supercharge that creates a buffer for those lump sums. When a payment comes due, I just write a check from that account, and never think twice about it.
Since all of the lump sum payments are due at different times of the year, the first year will require a few extra adjustments. For instance, if you’re calculating your Christmas budget in August, you have 4 months left before you have your lump sum payment, and 8 months have already passed. You’ll need to either catch up your deposits by depositing 8 times the monthly amount for the months that you’ve missed, or reduce your budget by 8 times the monthly amount, go cheap this Christmas, and save 4 months worth of your Christmas budget. Another solution would be to divide the annual budget by the number of months remaining before the payment is due. Once the lump sum due date has passed, you’ll be on schedule to have the money you need for the following cycle. Obviously some lump sum payments aren’t so discretionary, so you’ll have to break the cycle as far in advance of the payment due date as possible so when the due date hits, you’ll already have a portion of what you need saved.
Once you’ve identified all of your annual, bi-annual, semi-annual, quarterly, or non-monthly periodic payments that happen in your life, you’ll have a grasp on the corresponding monthly expense and you’ll have a better grasp on your plan.
Tuition for school is not an emergency, and neither are extra curricular activities, or prom, or other expenses that have come to others before you. If you can investigate the potential cost of something before it comes, you can include it in your lump sum payments. School supplies, bike tires, annual charitable contributions…you name it, it can be planned.
Don’t let this part of your budget pass you by. It’s as important as your monthly food budget. It’s going to take one full cycle to get the system rolling, but once you dial it in, you’ll no longer need to worry about the lump sum. Don’t forget to adjust if you start something new, but hey, you wouldn’t start something new without planning for it anyway.
