I have been trying to plan out a budget for the next 12 months, due to a goal to pay off a certain debt in that period of time, so every penny counts. However, I have run across an unusual and non-intuitive problem and am a bit stumped on what it means.
It is my belief that in order to avoid unexpected expenses it is necessary to save ahead for those expenses so that in the month that the bill comes due, the money is completely saved and ready to pay the expense. I have ten such expenses in my budget, and I am transferring the total monthly amount for each of these expenses into a savings account. These expenses occur every 3, 6, 12, or 24 months at staggered months (*), so I divide the expense amount by the number of months between occurrences to get the monthly amount to save.
(*) i.e. one monthly expense is in January, another in May, etc. in no particular interval, instead of all being in the same month, and the same is true for the expenses with other intervals.
However, since I started this savings plan in the middle of the year, some of the expenses are occurring before the required number of months have occurred: for example, property taxes occur at the end of each year, but nothing was saved for the first four months, so I take the amount that should have been saved in those first four months and save it now for the initial balance in the account.
Now the problem is, when I run out the projected balances over the next 12 months, I see that this savings account always has a lot more money than it needs to have - it never gets anywhere close to zero. This balance usually stays at least four times the monthly amount that needs to be saved. So I created a spreadsheet for the next 5 years, and I got the same result: the actual balance never drops below 4x the monthly amount I am saving! And in fact, if I look at the average amount spent per month over time it seems to start converging on a lower amount than the monthly amount that I am saving. But when I look at all the math, I have checked and re-checked, but don't see any mistakes:
- I am dividing each expense by the number of months between occurrences to get the monthly amount to save, and summing those to get the total monthly amount
- I am pre-saving the monthly amount for all previous months since the last expense to "catch up" to where I should be.
- Each month I add the sum of calculated monthly expenses to the savings account
- Each month I subtract off the actual expenses for that month, which I have triple-checked are correct
- In the month that a given expense is actually paid, the balance for that expense reaches zero, further suggesting that there are no math errors.
So am I incorrect that I need to save in this way? Why is there all this extra money in savings that I never seem to need?