What is estimating expenses about?
Estimating expenses is similar to estimating income. Both are equally important and use a prior period’s information as their starting point. Naturally, some expenses are more difficult than others to predict and therefore require conservative estimating. Since, unlike income, expenses can arise from tremendously diverse sources, estimating expenses is more complex and requires greater effort to do well.
Estimating expenses is useful in budgeting, planning to achieve financial goals, and avoiding financial problems
Estimating expenses is central to the budgeting process, because it is the first step in controlling the outflow of household income. Forecasting expenses is also directly related to achieving financial goals, whether or not you have a formal budget. Only by knowing what your expenses are likely to be can you plan for meeting financial goals.
Estimating expenses for a future period is a multi-step process
The following steps are involved:
- Review prior period expenses and determine which will recur in the forthcoming period
- Determine what new expense items are anticipated
- Estimate the amount of each expense for the period
- Add individual estimated expenses to obtain total estimated expenses
Estimate conservatively
Whether estimating expenses or income, good judgment requires that you estimate conservatively. Being surprised by lower than expected expenses is far more pleasant than experiencing a spending deficit. If you need to borrow funds to cover a spending deficit, you’ll be spending even more. Use the reasonableness test to avoid unrealistic estimates.
Expenses can come from many directions, so be careful not to overlook any that could be significant
Expenses that are uncommon and nonrecurring are the most difficult to predict, yet are frequently the cause of budget chaos. Here is a list that can help you avoid overlooking some important expense categories:
- Appliance repair/replacement
- Auto gas, oil, and repairs
- Charitable donations
- Children’s activities
- Children’s allowances
- Dental (uninsured)
- Entertainment (home and away)
- Food (home and away)
- Home care services
- Home repairs
- Income tax (portion not withheld)
- Insurance (auto, dental, health, home, etc.)
- Investment expenses
- Licenses and fees
- Medical (uninsured)
- Memberships/renewals
- Parental support
- Parking and tolls
- Real estate tax
- Subscriptions
- Vacations
