Personal Finance Blog

Expense Categories

Posted in Budgeting by fsaffiliates on March 25, 2010
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To build any type of budget: business, project or personal, you must understand expenses.  We’re going to focus on the personal or family budget and for some, the identification and collection of expenses is very straight forward.  For others, collecting this information may present greater challenges.  If I’ve just described you, then this post is for you.

One way to look at your expenditures is to break them down into expense categories.  There are as many ways to categorize your expenses as there are shades gray — you could note them by day of the month, by type of expense or by the dollar amount spent.  Each of these methods is valid as long as you have a thorough understanding of how your system works.  This is not to say that each system is created equal, however.  Some of these break downs would be too time consuming to manage, and worst of all, they may not make intuitive sense to you.

Let’s look at another way to examine expenses.  This system gets to the budgeting heart of the matter and identifies expenses by how the dollars ebb and flow.  This form is great for home expense categories, healthcare expenses, living expenses or any other type of expense that absorbs your hard-earned dollars.  There are four broad areas that we can choose from to slot our expenses:

  1. Fixed Expenses. As luck would have it, these expenses are the simplest to recognize.  These expenses are paid monthly and have the same amounts owed month after month, for the entire term of the commitment.  A great example would be ‘rent’.  Rent is paid out generally on the 1st of the month and the amounts paid monthly don’t change during the course of your lease agreement.  Likely, these are the expenses that readily come to mind when you think about how much you have to spend every month.  These are the best to manage because they rarely change.
  2. Variable Expenses. Still easy enough to recognize, but you may have to stop for a minute to recall all the items that belong in this category.  These expenses have a semi-permanent place in the hierarchy of expenses paid out monthly, and don’t really change unless you decide to change providers.  Phone bills and insurance bills are examples of these types of expenses.  These bills are okay because you know they are coming every month, but they may or may not cost you the same amounts every month.
  3. Semi-permanent Expenses. These expenses are hard to remember.  These are the types that take you off guard every time the bill for them arrives in your mailbox.  These expenses are billed quarterly, annually or even bi-annually.  An example of this type of expense may be your garbage bill (billed quarterly in my case) or annual home owners assessment.  These bills are less than okay because they commonly fall off the radar.
  4. Soft Expenses. If you don’t accurately track and predict these, you may as well call this a slush fund.  These are expenses that you know you’ll routinely have, but have an only vague idea of how much you really spend on them.  These expenses are things like daily lunch out with the office gang, a Starbucks for that afternoon pick-me-up or even weekend entertainment that goes from catching a movie to a full night out on the town.  These expenses are the very hardest to track and sometimes impossible consistently keep under control.  This area requires very special attention that we’ll pay in upcoming discussions.
  5. Emergency Expenses. These are just that, emergency expenses.  You will not know when or if they’ll surface, but they most certainly will (think death and taxes).  The car breaks, the dishwasher stops working, the roof starts leaking.  These costs will vary from just a few dollars to perhaps months of salary.  You may not be able to predict these types of expenses with any sort of accuracy, but you should be able to create a reasonable plan for getting most, if not all financially covered.

If nothing else is working for you to categorize your expenses, try this.  If you find that these definitions make sense and your expenses fall easily into the categories, you may have found a winner.  If, however, this explanation makes no sense, and you’ve given yourself some time to absorb it, it likely will not work for you.  There are many more resources available on the web that you can visit and learn from.  I’ll be sharing some very good ones in upcoming discussions and please, feel free to share your own great references.

In order for any expense system to work, it must be simple and intuitive to use.  Keep experimenting until you find a system that works for you.

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