We’ve seen Trish A. Example tally her income and expenses, figure out her Savings to Spend requirements and see if she has an Income Problem. Now we’re going to see if she has an Expense Problem, and what to do about it.
Trisha spends every cent she makes and then some, despite making a livable salary for her location. This is an expense problem. The question is, where is the problem and how do we fix it?
This is why we divided up the expenses into categories earlier. Let’s take a look at her budget again:
This is a tremendously mundane budget. None of her expenses are truly ridiculous, and her lifestyle is pretty typical. Let’s look at each expense category, one at a time.
- Loan payments/Savings: As I mentioned earlier, Trish’s loan payments are a smidgen over 20% of her net income. At $429 per month, if Trish were to no longer have those payments, she would find herself with ample cash flow for savings. Unfortunately, she doesn’t have the cash flow yet to pay off the debts and eradicate the payments. If she doesn’t make any changes to her income or expenses, she will find herself in a weird Catch-22, unable to create the income to pay off the debts because she has the debts.
- Fixed: The very nature of fixed expenses make them very difficult to reduce. She probably can’t move into a new apartment, since she probably is still under a lease. It would be unwise to reduce renters insurance and auto insurance. She could probably change her phone plan or the internet/TV package. She may want to look into that, but it won’t take her far enough, fast enough.
- Variable: There’s a little more wiggle room here. Since a great deal of these expenses are lifestyle expenses, which can be reduced. Of course, the downside is that her lifestyle will be reduced. She could reduce less critical expenses such as dining, entertainment, and other miscellaneous expenses.
- Intermittent: She needs to keep her car and dog in the municipality’s good graces. Perhaps she could reduce her clothing expenses for a while so that she can get rid of some payments by paying down the debts.
Let’s re-imagine her budget, only with some changes to her expenses, and model it over the next three months:
I’ve highlighted the changes from the previous month in yellow. As you can see, she’s definitely in the negative for the first month. Having the large intermittent expense right away doesn’t help.
Since the toughest part of a budget is troubleshooting the expenses, I’m going to walk you through the model.
June 1, 2011
We’ve looked at this month in greater detail in earlier posts. In real life, a budgeter that saw they would have a month like this would immediately make changes to their spending patterns so they wouldn’t have a negative month. I’m going to leave it up without any changes so you can see how quickly Trish can turn her budget around.
July 1, 2011
Trish made some change to both her income and expenses:
- She decided to sell some hobby equipment that’s been lying around, from which she earned an additional $75.
- She paid the car registration, so now the amount of money she has to save for next year’s car registration is divided by twelve instead of one. This lowers the savings to spend strain on her budget.
As you can see, Trish now has some positive income for the month! Yay! Trish is really enjoying the consequences of her wise decisions.
August 1, 2011
Trish get really excited about the progress she made last month and wants to really go all out. She makes a lot of changes this month:
- Trish is inspired by her progress and really wants to hit it out of the park this month, so she hunkers down and doubles her internet sales income to $300.
- Trish sells the last of her hobby equipment for $75.
- Trish dials down her charitable contributions to $20. She doesn’t like it, but she plans to increase her contributions substantially when she has her loans paid off. She thinks it’s a reasonable sacrifice.
- Trish then decided to dial back her service for both her internet and cell phone, which reduced the expenses to $25 and $25, respectively.
- Next, Trish reduced her grocery and dining expenses. She thinks she can buy some less expensive brands and brown-bag more lunches to work. Her new expenses are $200 and $50, respectively.
- Still flush from her savings, she decides to slash her entertainment expenses to $10 and her miscellaneous expenses to $5. These are some pretty deep cuts, but she’s still really excited about the traction she’s making in her money, so Trish gives it a try anyway.
- In the month after the vet visit, her intermittent expense is reduced to only $9 per month, since she now is dividing the expense by 12 months instead of one.
These are some pretty tremendous changes, pretty quickly. Will Trish be able to keep this up? Who knows? She’ll have to see how she likes living on what she said she would live on. Her budget isn’t written in stone for all eternity. Every month she gets to make changes and massage the numbers so that she has as much money as she needs for what she most wants.
She cut too much from August! How will she live?
If she cut too much, she’ll find out part way through the month, then she’ll adjust her budget for next month. Budgeting is a process that never really ends, since she has to make one for each month.
How can you plan that far ahead. Three months is ridiculously long.
I agree, you shouldn’t probably budget ahead more than one month, simply because you’ll probably need the flexibility. In this case I was modeling what could conceivably happen to Trish over a couple of months of budgeting.
Any other concerns?
Not right now.
Good. We’re pretty much done anyway. Let’s finish up by taking a look at what to do when your income varies a lot from month to month: Smart and Sassy Guide to Budgeting: Part 7: Variable Income.