How to save for bills that only come once a year

Why do annual bills feel like emergencies when they are not?

Because they arrive as a lump even though they were entirely predictable. Council rates, insurance renewals, vehicle licensing and annual subscriptions are all known well in advance, but if nothing has been set aside they have to come out of one pay cycle, and that is where the shock comes from.

The difference matters because the fix is different. An unexpected cost needs a buffer of unallocated money. A known cost needs the same total, just divided across the pays before it arrives.

What is a sinking fund?

A sinking fund is money put aside gradually for a specific cost you already know is coming. The term comes from accounting, and it is sometimes called a bill fund or bill smoothing.

It is usually kept separate from an emergency fund because the two do different jobs. Money in a sinking fund is already spoken for, so counting it as an emergency buffer means the buffer disappears the moment the rates bill is paid.

Which bills is this for?

Any cost that arrives once a year, or a few times a year, in an amount large enough to hurt in a single pay. The exact list is different for every household, which is why the useful version of it comes off your own bank statements rather than a generic list.

A full year of transactions makes these easy to spot, because the annual ones are precisely the costs that do not appear in a typical month and therefore never make it into a monthly budget.

• Council rates
• House, contents, car and life insurance premiums
• Vehicle licensing (rego), warrant of fitness and servicing
• Tyres, and the repairs a warrant tends to find
• Annual subscriptions and memberships
• School fees, uniforms, stationery and trips
• Dentist and optometrist visits
• Christmas, birthdays and travel to see family

How much do you set aside each pay?

You add up the annual total, then divide it by the number of times you are paid in a year: 52 if you are paid weekly, 26 if fortnightly, and 12 if monthly.

Take an example household. Council rates of $2,400, house and contents insurance of $1,300, car insurance of $900, vehicle licensing and a warrant of $250, and annual subscriptions of $180. That is $5,030 for the year.

Spread across the year, $5,030 is $96.73 a week, $193.46 a fortnight, or $419.17 a month. The total has not changed at all. What has changed is that it is now a known running cost that can sit next to rent and power, instead of five surprises. These figures are only an illustration, so the sum is worth redoing with the amounts on your own bills.

• Weekly: $5,030 divided by 52 is $96.73
• Fortnightly: $5,030 divided by 26 is $193.46
• Monthly: $5,030 divided by 12 is $419.17

What if the bill lands before you have saved enough?

Then part of it is covered, and part of it is still worth having. Starting partway through the year is the normal case rather than a special one, because the bills do not wait for anyone to begin.

The catch-up sum has the same shape. If a car insurance renewal of $900 is due in 15 weeks, the full amount is $60 a week. If $30 a week is what is actually available, there will be $450 in the account when the bill arrives, and the gap to find is $450 rather than $900.

One quirk of the calendar is worth knowing. A year is a couple of days longer than 52 weeks, so some years contain 53 weekly pay days or 27 fortnightly ones. Dividing by 52 or 26 means those years finish slightly ahead rather than short.

Can you pay these bills in instalments instead?

Often yes, and it achieves the same smoothing without you holding the money yourself. Councils bill rates in instalments across the year, and many offer direct debit so the amount comes out in smaller, more frequent payments. Insurers and many subscription providers offer monthly payment as an alternative to annual.

The question worth asking each provider is whether the instalment option costs more than paying in one go, because some charge extra for paying monthly and some do not. The difference should be stated on the renewal notice or the paperwork.

Councils also charge penalties on rates instalments that are not paid in full by the due date, and the penalty differs from council to council. Councils generally ask people to make contact before a due date rather than after it, because payment arrangements are usually easier to set up in advance.

What help exists if the annual bills are the thing sinking you?

Rates have a scheme of their own. The Rates Rebate Scheme is administered by the Department of Internal Affairs and provides a rebate towards rates for lower income ratepayers, with applications made through your local council rather than to central government. Councils also publish their own rates remission and postponement policies.

For everything else, MoneyTalks connects people with financial mentors, and the mentoring is free and confidential. Mentors deal with exactly this pattern, including talking to creditors and setting up arrangements, and the service is free whether or not anything has gone wrong yet.

• MoneyTalks: phone 0800 345 123, free text 4029, or email help@moneytalks.co.nz
• Your council's rates pages for instalment dates, direct debit, rebates and remissions