THINKING ABOUT EXPENSES
Let’s transition to the other half of your budget: monthly expenses, or, in other words, what you spend your money on. Let’s take this opportunity to discuss some ways to look at expenses.
FIXED OR VARIABLE EXPENSES
Fixed expenses are a definite amount every month and do not change. For example, rent (when you sign a lease) can be a fixed expense (during the lease anyway). Rent will be $800 (or whatever the amount is) every month. It is fixed. Fixed expenses are great for financial planning because we know how much they cost and we can plan for them and how they affect our budget.
Variable expenses are not definite and can change. For example, dining out is a classic variable expense. One month you may spend $150 dining out and another month you may spend $350. Variable expenses are not good for financial planning because you don’t know how much you are spending on them and the extra costs can hurt your budget if the expense grows. Variable expenses make it easy to erroneously overspend.
The solution: Try to “fix” all your expenses. That is, set a definite amount for each expense in your budget, even if it’s variable. For instance, in the previous dining out example, you may want to fix your “dining out” expense at, say $200 a month in your budget. This means you would allot $200 in your budget for dining out; that is your set limit. Your spending in that category will not vary; it will be $200. (By the way, I’m not saying $200 is the perfect amount to spend on monthly “dining out” expenses; your income and other expenses will determine that. This example is more about fixing a variable expense, or making it definite.)