If you’re following along with this series, you may have already taken a look at your spending over the last 12 months to see where your money is going. Now that you have a general picture of how you’re spending your money, it’s time to analyze your spending and make a plan for how you want to manage your money in the future.
Expenses can be categorized many ways and this post will use two basic types of expenses to create simple categories:
These expenses must be paid and do not change month-to-month. For the purposes of building our home budget, we’ll consider expenses such as mortgage/rent, car payment, insurance, student loans, etc. The amount due every month is the same and they are expenses you must pay, regardless of any changes in your shopping behavior or changes in your income.
Expenses such as food, electricity, clothing shopping, dining out, and entertainment are considered variable costs. These are expenses that can change based on usage or changes in habits. For example, if you remember not to leave the lights on or keep your home 1 degree warmer in the summer, you can reduce the total cost of your electricity bill. In other words, you can have an impact on these expenses.
The best way to budget expenses is to start with your fixed costs. These numbers typically do not change over the course of a year (unless you pay off a car loan or pay down your student loans faster than you expected). Once you have outlined your monthly fixed costs, start to take a look at your variable costs. I find it’s easier to take an average of your spending over the last 3-6 months for your variable expenses, as they can sometimes swing widely from month to month. For example, if in the prior month you went on vacation for a week, your electricity and water bills for the month wouldn’t properly reflect your average usage.
One thing to keep in mind is that your monthly numbers will never be the same. What you want here is to set up a guideline for your average spending on a month-to-month basis. When I first started analyzing our expenses, I fell into what I’ll call the one-time-expense trap. I would see an outlier expense (think replacing a car tire or an unexpected medical bill) and say to myself, “oh, that’s a one-time expense that I don’t need to worry about in the future.” The problem with that is that there is always a one-time expense. After a few months, I realized I needed to create a catch-all expense for our budget as a miscellaneous. This helped me better realize that there will always be expenses that may only happen once a year or once every few months, but they need to have a place in your budget.
Okay, now comes the fun part. What’s going on with your money? Do any numbers jump out at you? Let’s stick with the expenses from the example I used in the first budget post I did, and do an analysis on those numbers. For the purposes of this exercise, I have kept the numbers the same but I added more details to each category to show how variable and fixed expenses work within a budget.
It looks like there is a lot going on here, but I really only did two analyses. First of all, I looked at the percentages of how my expenses break down between fixed and variable costs. In this example, 66% of the costs are fixed and 34% are variable. Next, I looked at the percentage of each expense category to see how much of my overall expenses each category represents.
Now that we have a bit more data, it is easier to see where your money is going every month and help you identify areas where there are potential savings. Some of these savings may seem minor, while others could make a significant change.