Note that the list already factors in the anticipated end-of-the-year tax liability, so Jane is saving that money in advance. Although technically this payment isn’t due until April 15th, it’s still averaged over a 12 month period, because it’s an annual expense, but this won’t always hold true. For example, if you were planning a vacation in eight months and wanted it paid for before you embarked, you would divide the vacation expense by 8.
This illustrates how to factor in known future expenses, but it’s not always the best option; in this example, Jane might consider putting that money into paying off her credit card, because even if she ultimately uses her credit card for the tax liability, she at least saves the high-interest charges in the interim.
Also note that this example is not exhaustive; your income might include entertainment, cigarettes (quit now!), cable TV, magazine subscriptions, etc. Your budget should include every foreseeable expense. Tabulate receipts, bills and statements to help estimate these expenses. If you have trouble coming up with totals, write down every expense you make for several months and average them to fine-tune the budget you make today. But don’t wait months to create a budget; even a less-than-perfect budget is better than blind financial faith.
You might also consider adding a 10 percent margin of error to your budget to factor in overlooked, variable or unexpected expenses. You may never actually need this money, in which case it goes to savings, but it’s better to err on the side of caution. This is especially true if you don’t have any fallback savings or an emergency fund.