Budgeting Large Monthly Costs
Everyone has several large costs that they need to make each month, like car payments, mortgages, rent or student loans. The downside of these costs is that they tend to be a larger portion of your income, the bright side is that they are recurring, making it easier to plan for them.
Since I'm located in NYC and most New Yorkers' largest expenses tend to be rent, I will use that as an example.
For many years, I've heard the magic number of 30% floating around as to what percentage your rent should be of your income. The reality is this depends on your income and where you are living. If you're living in California or New York, in some cities median rent can be as high as $2,100 for 1 bedroom apartments and $2,500 for 2 bedroom apartments.
If you are paying $2,000 in rent per month, using this 30% rule you will need to take home a minimum of $80,000 after taxes. But reality is never picture perfect, you may be spending more for the benefit of living closer to work or paying less because you're living with a friend or a family member. The possibilities are endless, one thing remains, you have to make these payments monthly.
One of the biggest mistakes I see people make is saving that full rent payment for the last pay period of the month. They pay the rent in time for the rent payment due on the 1st of the month and then have $100 left until the next pay check. If you manage your finances very closely and budget your rent payment this way, there is still not much room for error.
Splitting this high cost between your pay periods in that month will help alleviate the burden of this high cost. The rent cost is split in half between the two pay periods, making that high payment easier to sustain.
Let's take an example: you take home $4,000 per month, paid to you semi-monthly, and your monthly rent payment is $1,500.
If you save your entire rent payment for the last pay period, you will have only $500 for any other costs you may need to take care of, food, and emergencies.
If you split the cost up between the pay periods, you would have put down $750 during the first pay period of the month and will only need to add $750 to that rent payment and will have $1,250 remaining.
Having $1,250 left for all other expenses and spending money is much more comforting than $500. It already sounds more manageable. Making your financials manageable is a huge part of why it's important to work on your budget.
Have you budgeted for these types of costs differently? What has worked for you?
