Manage Your Money Better, Set Up a Budget!

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Pi

It’s time to dig into your spending habits!

This is Part Two in a series of posts about managing your money by creating a budget.

In Part One, Get A Handle On Your Money, Stop Stressing you learned why you need a zero sum budget in order to take control of your money.  In this post, you will learn the three types of expenses; Fixed, Flexible and Irregular. You will also figure out the categories of expenses you have and what you normally spend in them.

Setting up a budget takes time and effort upfront, but less to maintain once the initial work is complete. Choose a time when you can focus without too many distractions.

Let’s get started.

  1. Gather information. Grab your checkbook or computer to look at your last statements from your bank. You’ll need online accounts if you don’t get paper statements for credit cards, utilities, etc. Gather bills and receipts for everything you can think of you pay.
  2. List categories of expenses.  Examples: Rent/mortgage, utilities, phones, cable, auto insurance, groceries, household expenses, car payments, fuel, entertainment, clothes, auto maintenance, gifts, student loans, hobbies, pets, etc. Try not to leave anything out. You want a good picture of where you are spending your money. On credit card statements look at what you put on your card. Look at the past couple months if you can.
  3. Add up expenses in those different categories. Write down how much you spent last month in each category.  If you only have one month’s information, just go on that, but if you have more than one month’s write down the average.  It’s okay if you are not sure or can’t find bills and receipts, give it your best guess. You can adjust the amounts later. You just need a starting point.

Three Types of Expenses

Now you will assign each category you identified to the type of expense it is for you; Fixed, Flexible or Irregular. Make a list with those three headers and list the categories where they fit.

Three Categories of Expenses

Organize your categories of expenses into the three types of expenses; fixed, flexible and irregular.

1. Fixed Expenses

Fixed expenses are the same amount every month. This might include rent/mortgage, car payments, insurance, cable or internet, or student loans. They may change once a year.

Categories that are fixed can make things simpler because you know for sure how much to budget.

It’s helpful to set this up for more of your bills by signing up for an average monthly payment plan with your utility companies if they offer this. I do this for my electric and propane bill. Each month I know how much to budget and once a year they adjust the amount as needed. I don’t get a surprise bill that throws off my budget this way. I also pay my auto insurance monthly instead of semi annually and have it automatically deducted from my account.  Some companies offer a small discount for having payments automatically deducted from your bank.

These are my fixed expense categories.

  • Mortgage
  • Propane
  • Electric
  • Cell Phone
  • Internet
  • Auto Insurance
  • Netflix

2. Flexible Expenses

Flexible expenses are monthly expenses but you have more flexibility in how much you spend in these categories such as; groceries, entertainment, household expenses, and fuel. If you have credit card debt, put them under Flexible Expenses and write down the minimum monthly payment required if you carry a balance. If you pay off your bill every month, write down the average amount.

Here is a list of my flexible expense categories

  • Groceries/eating out
  • Walmart – household things and anything I buy at discount type stores
  • Entertainment
  • Gasoline
  • Blow Money – Mine to spend on whatever I want. This usually goes for eating out or things at garage sales and thrift stores.
  • Kids’ Commissions  – This is for money I pay my kids for work they do. They do not get an allowance.

3. Irregular Expenses

Now we will take a look at something most people do not include, your irregular expenses. These expenses are very important to budget. They are the ones that end up going on a credit card if you don’t and you end up paying interest.

Irregular expenses are for the plumber, repairman, new tires on the car, school expenses like field trips, enrollment fees and clothing, car tags and medical expenses.  These types of expenses are unpredictable or only come around occasionally, but you can almost guarantee they will come up at some point. Because of that, it’s better to plan for them so you don’t have to use money from your emergency fund.

It’s not really an “emergency” that your car tags are due. It happens every year.

To get an idea of your irregular expenses you will have to look back or at least think back longer than the past month.  Look back at statements and bills if you have them.  Write down categories for the types of these expenses you had and how much you spent on them over the last year if possible.

Take the total you spent in each category last year and divide it by twelve.  This is the amount you will save each month over a year for your expenses in this category. For example, you budget $100 a month for home repairs/maintenance because last year you spent about $1200 for various things that came up.

If your car tags are due in four months though, you’ll have to divide the amount that will be due by four to save it up quickly. Then the amount will reduce after that and you’ll have a whole year to save.

Here is a list of my irregular expenses in no particular order.

  • Charitable Donations
  • Hair Cuts & Styling
  • Pets/Veterinarians
  • Gifts
  • Home Repairs/Maintenance
  • Kids’ School
  • Trash
  • Clothing
  • Car Tags & Taxes
  • Auto Repairs/Maintenance

If you own your home and do not have homeowners insurance and property taxes included in your house payment with an escrow account, then you will want to be sure to include them here. Medical expenses could be another account.

Good work!

You’ve worked hard to get this far. Trust me, it will be worth it. Here’s an example of what you should have by now. Yours will look different. Everyone has different categories they spend money on and what you call them is up to you.

  • Fixed Expenses
    • Rent   700
    • Electric  75
    • Phone    70
    • Netflix  18
    • Car payment 300
  • Flexible Expenses
    • Groceries  300
    • Household supplies  100
    • Gasoline     200
    • Entertainment 200
  • Irregular Expenses
    • Clothes      75
    • Auto maintenance  25
    • Medical  25
    • Home repairs 100
    • School Miscellaneous 40
    • Veterinarian   25

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In Part Three, you will learn about the two prong approach I use to eliminate stress: Manage Your Money with Envelopes & Freedom Accounts.

If you have questions about what we’ve covered so far, leave them in the comments.  I’d be happy to help.

 

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