Knowing what type of expenses are in your budget might seem silly, but it’s the only surefire way to get your family budget and spending under control. Taking the time to learn how to identify what types of expenses are in your budget is the first step!
Did you realize your budget has four types of expenses in it? Most folks never give it much thought so don’t feel badly if you didn’t.
Knowing the types of expenses in your budget is important though. Not only can it help you plan how to spend each paycheck, but it will allow you to make any adjustments, to identify a bad spending habit, to build your emergency fund and more.
In other words; knowing what expense type your budget contains and what each of them are is almost as important as having a budget in the first place is.
How Do I Know What My Expenses Are?
Ideally you are paying enough attention to your spending to know what your expenses are, but I am well aware that is not always the case. Not only is it easy to get out of the habit of paying attention to your spending, but in a world filled with monthly subscriptions and such, it can be easy to take on more than you realize.
This is why it’s important that everyone – whether you save receipts and track your expenses or not – to do a financial audit. It allows you to get a clear idea of your spending habits, to adjust any long term goals you may have and more.
It’s also the first step to creating a family budget so it’s worth doing anyhow.
How to Audit Your Spending
The quickest way to audit your spending is to check your bank statements. Print out or download the last three months worth of bank statements and plug each expense by name into a budget spreadsheet.
You can choose to name each expense individually or simply group duplicates together by budget category.
Once you have all three months done, you can begin to identify what types of expenses are in your budget. From there, start working your way backwards until you get to a one-year mark looking for occasional expenses that aren’t a regular purchase for your family.
To finish out a quick budget, figure out how much money you have coming out in expenses and subtract that amount from your monthly take-home pay. This is a very, very basic budget and will only serve to show you if you have enough money to live and if you need to reduce your monthly spending. or not.
What Are the 4 Types of Expenses?
Budgets typically have four types of expenses; discretionary, fixed, variable and short-term. Pretty much any expense that a family is going to have will fit into these four expense categories.
Occasionally you’ll find a different type, but they are uncommon so we won’t be discussing them in this post. Doing so would make this post overly complicated and that is just unnecessary.
What is discretionary expenses?
The first type of budget expense I want to mention is the one that can be the most damaging to your financial goals. Simply put, discretionary expenses are wants and are never necessities.
These are the fun expenses you have and while I believe every budget should have some fun money for entertainment, they can easily get out of hand if you are not careful. Then, before you know it, your financial situation is out of control and you’re facing a financial crisis.
What Are Examples of Discretionary Expenses?
Whether you like it or not, I’m willing to bet quite a few of the expenses on the list you made during your audit are discretionary.
These can include things such as:
- Your gym membership
- Gaming costs
- Hobby costs
They make your life more fun, but if you have too many, that fun won’t last and you’ll soon find your savings accounts drained and that you’re suddenly struggling.
Fixed expenses are things you pay monthly that cost you the same amount of money every month. They are easy to plan for and easy to save for because they rarely change in price.
When you update your budget – or create a family budget if you don’t already have one – fixed expenses will very likely be a large part of it. I consider this a good thing since it allows you to have a better idea of what is coming each month.
What Are Examples of Fixed Costs Expenses?
As I mentioned earlier, fixed expenses stay the same in price but that doesn’t mean they are all necessary. Discretionary expenses can also be fixed expenses. As you list the types of expenses your own budget has, be aware of which fixed expenses are discretionary as well.
Fixed budget expenses can include:
- Rent Payment
- Child Support
- Mortgage payments
- Car payments
- Car Insurance
- Health Insurance
- Life Insurance
- Loan payments
- Internet service
- Phone bill
- Netflix and other streaming services
- Gym Memberships
Variable expenses are the expenses that change from month to month. Variable expenses are the ones that give you the most control over your where your monthly income goes and what your monthly expenses run you. Should you need to reduce your cost of living, these will be some of the first that you can work on without harming your budget in other ways.
They are also the ones that will most often be easiest to build a cushion or emergency fund for.
What Are Examples of Variable Expenses?
Variable expenses are typically needs, but this type of expense is harder to plan for due to their changing costs. As you build your budget, it is always a good idea to leave enough wiggle room to help cover a spiking cost that you may not expect.
Variable expenses can include:
- Credit Cards
- Utility Bills
- School Fees
- Medication Costs
- Pet Costs
Thankfully, even though variable expenses are harder to plan for, they are also easier to save money on.
You could also use a service such as BillTrim HERE to see where you can cut variable expenses.
If your budget is too tight and you have already removed all the discretionary expenses you can, look to your variable expenses as the next place to cut costs from.
How to Determine if Costs Are Fixed or Variable?
Determining if a cost is fixed or variable simply requires a look back at the monthly bill for the past few months.
If the amount is the same, the expense is fixed.
If the amounts are different, the expense is variable.
Personally, I prefer to make all of my expenses fixed. This means that I budget a higher amount each month for variable expenses. As an example, if I know the bill rarely goes above $100 per month, I will simply budget $125 for that bill each month.
Doing it this way ensures I always have a surplus for that expense and often allows me to build a credit on the account in case we have a financial emergency.
What are Short-Term Expenses?
Short-term expenses are exactly that; expenses you will only need to pay for a short amount of time. Emergency expenses and your emergency fund fall into this category, but the expenses here do not always have to be an emergency.
Because they are short-terms costs, you do need to account for them ahead of time if at all possible. This is why having an emergency fund is so important. You can plan for some short-term expenses, but unfortunately, you can’t plan for all of them.
What Are Examples of Short Term Costs?
As I said, short-term expenses will almost certainly include both emergency expenditures and non-emergency. Because of that, the list of what a short-term expense is can seem a rather odd mixed bag of costs.
They can include:
- Home Repairs
- Car Repairs
- School Graduation Costs
- Medical costs
- Vacations or Travel
- Appliance upgrades
- Start Up Business Expenses
How Do You Categorize Expenses in a Budget?
After you know what each type of expenses your budget has, it is much easier to start thinking about how to budget them.
To do this, pull the list of expenses you made earlier back out and begin to categorize them using the four types of budget expenses in this post.
Begin by listing your fixed expenses. Do any of them fall-into the short-term or discretionary categories as well? If so, double check that you absolutely must spend the money on them. If so, add them to your budget. If not, cancel them now while you are thinking about it.
The remaining expenses on your are variable, but again, they can also be discretionary or short-term expenses. Repeat what you just did with your fixed expenses with these.
Keeping your variable and especially your discretionary expenses separate from your necessities and fixed expenses is important. It gives you the option to look, at a glance, at what things can be cut or worked on should you have a month where your variable expenses are higher than normal such as during a heat wave when you need to run your a/c more.
Once your expenses are fully categorized, you can really get to work on creating your family budget. Plan fixed costs first followed by variable and finally discretionary. Having a solid budget in place will help to ensure your family is on solid financial ground and working toward your financial goals.