Financial

3 Ways to Think About Your Expenses

What comes to mind when you think about your expenses? Maybe rent, food, transportation, shopping, personal care, and so on. Your expenses are anything that you spend money on and they are the main building blocks of a budget. But before you create a budget, you need to fully understand what your expenses are, and — just as importantly — how they impact your budget differently. 

1) Fixed vs. Variable

First up: fixed and variable expenses. Fixed expenses are your bills or anything with a due date: rent/mortgage, cell phone, subscriptions, insurance, daycare, minimum debt payments, etc. They typically cost about the same amount every month. Variable expenses fluctuate on a weekly and monthly basis. They include groceries, dining out, entertainment, shopping, gas, personal care, and Ubers.

The frequency with which you make decisions about these types of expenses is one of the major differences between them. For example, you make choices about variable expenses daily: which groceries to buy, which meal to order at a restaurant, and which shirt to purchase, but you make decisions about your fixed expenses far less frequently. You might need to decide annually whether to stay in our current apartment or move. You get on a cell phone plan and stick with it for a few years. You buy a car knowing that you will have five years of payments. Because of this, each decision about a fixed expense is usually higher stakes than a decision about any single variable expense. But don’t let that fool you into thinking that variable expenses don’t have as big of an impact on your budget — they do; it’s just a cumulative impact rather than a one-time choice.

Understanding fixed and variable expenses can also help identify where your budgeting focus should be throughout the month. Because your fixed expenses are constant, you don’t need to monitor your spending on them, but if you don’t track your variable expenses, there is a good chance you’ll go over budget. In other words, if your budget is off, it’s more likely due to spending extra takeout, not because you went over budget on your gym membership. 

2) Necessary vs. Discretionary

The next important distinction you can make between your expenses is necessary and discretionary. Necessary expenses include the basics you need to live: housing, utilities, food, transportation, and medical bills. Discretionary expenses are those that enhance your life, but you could live without them. These include shopping, dining out, personal care, and entertainment.

There is a lot of overlap between fixed and necessary expenses and variable and discretionary expenses, but they do not always line up. For example, subscriptions like Netflix and gym memberships are fixed expenses, but they are also discretionary. Gas for your car is a variable expense, but it is also necessary. 

This expense framework is a key part of the 50/30/20 budget, which prescribes allocating 50% of your income towards needs (i.e. necessary expenses), 30% to wants (i.e. discretionary expenses), and 20% to savings. However, it can sometimes open your spending up to moral judgment and make you feel like you shouldn’t be spending money on discretionary purchases, which isn’t necessarily true.

3) Controllable vs. Uncontrollable

Thinking about your expenses as controllable and uncontrollable can also be a useful framework. Controllable expenses are in your power to change, while uncontrollable costs are not. 

This concept most commonly comes up in business, but it can also inform your personal budget. Unlike necessary and discretionary expenses, it does not require you to ask whether you need to spend on a particular expense. It encourages you to ask whether the expense is in your control. This shifts the decision-making power back to you, which is where it should be. 

It’s also a much more individualized question. For example, is your housing expense controllable? Someone who has extra space might decide yes, they could reduce their monthly housing cost by getting a roommate. On the other hand, someone who just signed a new lease on a studio apartment could say no, at least not until their lease is up again. 

Final Thoughts

Looking at your expenses through these three frameworks can help you think about your budget differently, identify what you need to track, and where you can make changes. Ultimately, it will lead to a more optimized budget tailored to you! 

If you are ready to work on your budget, check out our B.F.F. approved budgeting tools.



Source
3 Ways to Think About Your Expenses is written by Kylie Lipinski, A Certified Financial Trainer for financialgym.com

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