To create an effective budget, you should include 5 different types of expenses. With them, you’ll have enough money to satisfy your needs and wants so that you aren’t left short on cash. Not only that, including them all but guarantees that you’ll be putting money towards your most important financial goals, too!
Here are the 5 different types of expenses you need to include to create a better budget!
When it comes to budgeting, most people consider their fixed expenses first. These are your recurring costs that get paid every month and tend to remain constant over long periods.
Since these types of expenses don’t change, they’re easy to plan for. Each month, you know that you’ll incur them and the amount you’re going to pay.
For most people, the largest percentage of their total monthly spending is on fixed expenses. They not only cover your basic financial needs but a portion of your discretionary spending as well.
Despite these expenses being fixed, there’s still a good opportunity for you to save money on them. By refinancing your loans and shopping for less expensive service providers, you’ll likely save money. Also, since they consume such a large portion of your income, a small reduction in them can significantly decrease your burn rate!
While fixed expenses tend to be consistent, your flexible expenses vary. The amount you spend on them typically changes from one month to the next and as your desires change, too.
You have greater control over your flexible expenses than your fixed ones. You get to choose which ones to include in your budget based on your values and priorities. Not only that, you get to decide the extent you’re going to spend on them, too!
Most often, these types of expenses get associated with your lifestyle choices. They include the material possessions you want to own as well as the experiences you’d like to enjoy!
Your flexible expenses also include your day-to-day spending and many times there are less expensive options available. For example, you could go to Starbucks or brew coffee at home, just as you might decide to attend a sporting event instead of watching one on TV.
Most people spend heavily on flexible expenses because they tend to improve your quality of life. Because of this, many people’s spending also gets carried away on these types of expenses. Without realizing it, they may spend emotionally to make up for deficiencies in other areas of life, causing them to over-consume and go over budget in the process!
To keep your flexible expenses in check and have an enjoyable lifestyle, try prioritizing your spending to your most important wants. These are a select few desires that add to your mental and emotional well-being the most. By spending on them, you’ll not only feel pleasure, but you’ll also be getting the biggest bang for your buck!
Like fixed costs, your periodic expenses occur regularly. But instead of incurring them every month, they’re less frequent. It’s most common to pay them quarterly, every six months, or once per year.
Periodic expenses aren’t necessarily fixed amounts though. Since they occur every so often, the amount you’re charged can change from one billing cycle to the next. Most likely, you’ll end up paying more due to price increases, policy changes, or even inflation!
Despite most periodic expenses being recurring costs, most people still get surprised by them. Since they aren’t paid frequently, these types of expenses are often forgotten about and aren’t budgeted for, either!
To make sure you can pay your periodic expenses, try using reserve funds. With them, you’ll save a portion of the bill each month. This way, when the bill comes due you’ll already have the money set aside and can pay it in cash!
Like most places where you spend money, you can save on your periodic expenses, too. When it’s possible, try shopping between different service providers and comparing their rates. In many cases, you can shop for things like insurance premiums and repairs costs online, allowing you to save time and money from the comfort of your home!
For most people, it’s their irregular expenses that are hardest to budget for. Not only do they tend to occur without warning, but usually you have no idea how much they’re going to cost, either!
Most irregular expenses are one-time non-recurring costs. Usually, they’re triggered by an unexpected event that leaves you with a bill to pay.
Without a way to pay for your irregular and emergency expenses, your budget would quickly fall apart. Not only that, but these costs can leave you struggling to pay for all your other types of expenses, too. If that were to happen, you might even find yourself in the middle of a full-blown personal financial crisis!
Irregular expenses are difficult to plan for because they’re sporadic and unpredictable. Still, you need to be prepared for the day that you will incur them.
To pay for your erratic expenses, consider putting money aside into a rainy day savings account and emergency fund. By using them both, you’ll have liquidity and can pay your irregular expenses in cash!
Did you ever think that one of your different types of expenses could be savings? Well for those who use a zero-based budget, it is!
Most often, people have no problem spending money and it may even be your top priority. You may even go so far as buying everything you need and want without considering if any money will be leftover. Due to this, you may be like one of the countless Americans who admit to not saving enough money for retirement.
If you’re like most people, you spend money before you save it. Having said that, including a savings expense in your budget makes it more likely that you’ll put money aside because bills typically come first!
Saving money should not be an afterthought. Instead, you should do it proactively. If you don’t, how else will you accomplish your financial goals or live out your dreams?
To make sure you can, strive to make 20% of your income a savings expense. If you fall short on this amount, then finding ways to be more frugal with money or living like a tightwad can help!
By spending less and saving more, you’ll be better prepared for the future. On top of that, you’ll have the time and resources to devote to making memories, which is one of the many things that money can’t buy!
With a budget that includes each of these 5 types of expenses, you’ll have a reliable spending plan that works. It will allow you to pay your bills on time and cover emergencies while maintaining a high quality of life. Not just for today either, but in the future as well!
Which of these types of expenses are missing from your budget? Comment below.
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