How to Manage Irregular Expenses With Limited Cash Flow

Emily Roberts received a PhD in biomedical engineering from Duke University in 2014. She is the founder of the websites Grad Student Finances, PhD Stipends, and Evolving Personal Finance. Connect on Twitter with @GradFinances.

Irregular or non-monthly expenses can be difficult to weather for anyone, but even more so when you have a low income or little to no discretionary income. Irregular expenses are a nearly universal pain point among graduate students. Any (relatively) large expenses that crop up once or a few times per year can pose a problem, and common examples include school fees, taxes, car registration, car repairs, travel, conference expenses, entertainment, electronics, clothes, home furnishings, insurance, gifts, and medical expenses.

For grad students without much available non-emergency cash, there are limited options for paying for these types of expenses that don’t involve debt: increasing ‘income’ or decreasing spending. A grad student with a side income may be able to ramp up work when an irregular expense crops up. Another grad student may be able to clean out a closet and generate some quick cash on Craigslist or eBay. Frugality in variable spending areas, such as shopping, groceries (eat down your pantry!) and restaurants/bars, entertainment, gas/parking, and personal care, may be sufficient to pay for the expense. An undesirable idea that grad students may consider is to rely on credit cards to float or spread out the expense. This is a dangerous strategy because it is easy to let a balance accumulate, credit card debt is very expensive, and the cycle is hard to break for people with low incomes.

Instead of being forced to make difficult last-minute decisions or put themselves in financial jeopardy, grad students can get ahead of irregular expenses by generating short-term savings that are earmarked for the specific expenses.

Building up cash to have available for these types of expenses certainly takes planning, self-control, and sacrifice in the short term, but it is well worth the long-term benefits of reduced stress, increased confidence in spending decisions, and the ability to say yes to unexpected opportunities.

My husband and I reached a point of frustration with the irregular expenses in our lives about halfway through our PhDs. We had to decline some wedding invitations that we really wanted to accept due to the cost of traveling. This distress spurred us to try to save ahead for the travel we anticipated in the upcoming year. We soon applied this strategy to other areas of our budget.

If it were easy to build up significant savings with a low amount of available cash flow, everyone would have it in place already. For those people, like my husband and I, who don't naturally live well below their means and watch their checking account balance grow, certain strategies and psychological tricks may make this process more palatable.

The key strategy we used was to set up a system of targeted saving accounts or sinking funds. With this strategy, you essentially convert irregular expenses to regular expenses by spreading out their impact on your cash flow over several months or a year. Targeted savings accounts are either literally distinct savings accounts or simply notations within a single savings or checking account. (If your bank doesn’t allow you to open multiple savings accounts for free, look into an internet-only bank like Ally or Capital One 360. Nickname each account with the category of spending it represents.) The money in each account is designated only for its individual purpose. To fund the account, you anticipate the expenses in each category over a period of time (e.g., a year) and set up a monthly savings rate to pay for the expenses. When an expense occurs in the category, you draw money from the account to pay for they expense.

Returning to the travel example that inspired my own finances, to implement this strategy my husband and I projected all the traveling we expected to do over the course of the upcoming year. Generally, that included a few trips to see one set of parents or the other, travel to a few weddings, and sometimes travel for a special event like a reunion. We assigned an amount of money that we would need to each event and used the total amount of money we expected to spend to calculate a monthly savings rate. The exact number of out-of-town weddings we attended were difficult to pin down a year in advance, but we took a guess based on the previous year's spending. As the year progressed and the events came into focus, we adjusted our cost estimates to be more accurate and changed our savings rate.

You could project an entire year’s irregular expenses all at once and start saving immediately for everything, but there is an easier and more gradual way to get started with targeted savings accounts. Each time you encounter a difficult irregular expense, figure out the next time it will occur and in what amount. Calculate your required savings rate by dividing the amount of money needed by the number of pay periods you have to prepare for it. Then, set up a recurring automatic transfer from your checking account to the appropriate targeted savings account (create a new one if needed). You will be prepared for that expense the next time it arises.

You can create as few or as many of these accounts/designations as your lifestyle suggests. By the time my husband and I finished grad school, we had proliferated our targeted savings accounts to cover travel, car, medical, community supported agriculture, electronics, entertainment, appearance, and tax expenses.

Converting irregular expenses to regular doesn’t make money magically appear out of thin air, but we did find its structure helpful for motivating us to find ways to cut our spending in certain areas or earn extra money. The main benefit we experienced was reduced stress and a feeling of more control over our money as we moved from being reactive toward our irregular expenses to proactive.

[Image by Craig Chew-Moulding and used under Creative Commons Licensing.]