Why is it so difficult? First, most people don’t like to be confronted with how much they’re actually spending. It’s a pain to see how much money is slipping through their fingers. It’s also no fun to slow down on spending. Obviously the best response from an emotional point of view is to ignore the whole thing. However our valiant heroine, Trish A. Example, will not be deterred from her quest to make a budget. Instead, she plunges right in.
Trish gathers up copies of her monthly bills. Some amounts and categories are easy to make, such as Rent: $605, or Car Insurance: $100. Some amounts vary, like the electrical bill. In that case, she estimates how much she will spend that month on electricity from the previous bills. Then there are the really wild costs, like clothing. Trish sometimes goes a month or three between excursions, but then she spends quite a bit of money. In that case she’ll estimate her yearly expense and we’ll help her get her Savings to Spend account set up a little later. Trish also isn’t too particular about how she sets it down, just that the expenses are down. Here’s what she comes up with:
Wow, look at the net income! Trish is working all month, but ony coming out $91 ahead in the end. Not cool. We’ll look at changing that in a minute, but before we do, we’re going to clean up the expenses so that they’re a little more informative.
First thing Trish going to do is to place her expenses into four categories: fixed, variable, intermittent, and loan paydown/savings.*
- Fixed: Expenses that are largely consistent from month to month, and so are pretty predictable: rent, come insurances, some utilities
- Variable: Expenses that will vary significantly from month to month: gasoline, groceries, dining, some utilities
- Intermittent: Expenses that occur less frequently than monthly: car registration, taxes, some insurance
- Loan Paydown/Savings: Technically not entirely an expense, but we’re going to treat it as if it is since that’s the general effect it will have in the budget: student loans, car payments, credit card payments
So, Trish organizes her monthly budget by fixed, variable, and loan paydown/savings expenses. She’s going to take care of the intermittent expenses in a minute.
Trish still only has $91 a month after this, so it didn’t change the net income. However, we can now clearly see that Trish is sending a pretty big chunk of her income to debt payments (20%.) She also can look at the totals for fixed and variable spending. Now that Trish has a decent handle on her regular expenses, she’s going to take a look at her intermittent expenses.
Hey, I make more/less than that and spend more/less than Trish. Clearly this is inapplicable to me.
The secret of budgeting is that you fill in your own numbers. Budgeting works at nearly any scale. Don’t wuss out just because your numbers are different.
I don’t like your tone.
I said this is the sassy guide to budgeting. Consider this to be your complimentary sass.
Fine. What’s up with this intermittent expense business?
Glad you asked! That’s in the next part: Smart and Sassy Guide to Budgeting: Part 4: Savings to Spend.
* To the best of my knowledge, I’m the only person who distinguishes between expenses this way. I find this method of categorizing expenses extremely helpful because each category uses a distinct approach to effectively manage the costs. This method of categorization isn’t official/kosher accounting, but I think it’s superb for our purposes, which is to better understand and manage our expenses. Just be aware that “fixed expense” and “variable expense” have a different technical definition than I’m using here.