Budgeting (Part II): Where does the money go?
Sabah Karimi • May 28, 2014if( has_post_thumbnail( $post_id ) ): ?>
Last week, we shared some tips for taking control of your finances and recommended tracking daily expenses for at least 72 hours. If you’ve been logging your purchases for the last few days, you now have a fair idea of how much you are spending on those little extras — fast food, coffee, or impulse buys at the convenience store. Today we’ll focus on the expenses column of your budget so that you can classify and organize your expenses, and see exactly where your hard-earned money is going each month.
Fixed vs. variable expenses
Take some time to list all of the bills you pay and purchases you typically make over the course of the month. This master list will make it that much easier to identify your fixed and variable expenses, and account for all of your monthly expenditures.
Fixed expenses are the costs that don’t change (much) from month to month. These might include:
- Mortgage or rent payments
- Property taxes
- Insurance premiums (medical, dental, car, life insurance, etc.)
- Income taxes if self-employed
- Cable and Internet
- Phone services
- Subscriptions, memberships and monthly dues
- Savings or investment contributions
- Debt payments (if the amount is the same from month to month)
- Recurring medical expenses
Variable expenses are expenses that tend to fluctuate from month to month, and are costs that you do have a certain degree of control over. These might include:
- Debt payments (if it varies from month to month)
- Gas and transportation
- Gifts and donations
- Clothing and personal items
Adding up the total expenses from each category will help you determine how much it costs to live your current lifestyle. Doing this for even a few months can help you get a fairly accurate idea of what your actual cost of living is, based on current needs and habits. At this stage, you also need to accommodate for one more ‘type’ of expense: miscellaneous expenses.
Making room for the miscellany
This would be a good time to take a closer look at that spending log you started a few days ago. Making room in your budget for ‘miscellaneous expenses’ can make it that much easier to manage your budget and still enjoy some spending freedom. Are you really going to create a budget for those coffee runs? Unless it’s a daily habit, it’s unlikely those coffee fixes or the occasional meal out is going to be a fixed expense.
Let those extra purchases fall under a miscellaneous category so that you can:
- Enjoy little luxuries like coffee, drinks after work, or going to the movies without going over budget
- Account for extra purchases as a whole, based on your average weekly spend from your spending log calculation.
- Have peace of mind knowing that those extras are already accounted for.
Think of your miscellaneous expense category as your own expense account — one you may or may not end up tapping into over the course of the month. When you have a handle on how much you are spending in this area on a weekly basis, make room in your budget for it as a fixed expense. It will simply serve as a cushion to help you better manage your budget.
Stay on budget with this simple tip
One of the first things most people do when it’s time to start budgeting is to cut out all extras. If you eliminate all of your favorite things at once, the effects of ‘depriving’ yourself can trigger the urge to spend more … and go over budget.
If you’ve discovered that you are, in fact, buying unnecessary items or shopping impulsively, focus on curtailing those habits instead of cutting out all spending. If your goal is to save more money over the course of the month, focus on culling some of the larger variable expenses in your budget and work from there.
We’ll share tips on scaling back on certain expenses in future posts.
Stay tuned for the next segment of our series where we’ll do a quick debt checkup and provide tips for putting together a debt payoff plan.