Personal Finance Basics: Expenses (Where did all the Money Go?)
You know your income, but where is it all going? Most people can track their income but fail at controlling where the money goes. This failure is what keeps people trapped and not moving forward on their financial roadmap. Do you know where your money is going?
Early in my career I knew and worked with a great brother who was an accountant. At the time we were living paycheck to paycheck and trying to make ends meet. We were discussing with him our finances and our hopes and dreams and during one of our conversations he stated it doesn’t matter how much you make as much as it matters how you spend the money you make. He knew people who were making $20,000 a year and were able to pay off debt and live comfortably. He also knew people who were making $100,000 per year and not even able to pay their bills.
At the time, I would have to say I didn’t believe him as much as I should have. As we began to make more money it became evident that we could spend money faster than we made it if we weren’t careful. We had to learn to track and control the expenses if we wanted to save for the future and use the blessings we had for more than just the bills that came in the mail box.
Classifying Expenses: Fixed vs. Variable
The control of expenses is a direct measure of our financial discipline. A good steward guards the resources entrusted to him by preventing waste. To build a budget that works, you must distinguish between the non-negotiables and the flexible areas. Your bills that have a due date and your daily expenses you have more control over.
Fixed Expenses (The Non-Negotiable)
Definition: Costs that are generally the same amount every month and are difficult or impossible to change in the short term. These are the foundation of your budget.
Examples: Rent/Mortgage, Car Payments, Insurance Premiums, Gym Membership (if under contract), Debt Minimum Payments.
Actionable Tip: Even though they are fixed, you should regularly shop around for better rates on items like insurance to lower your baseline cost (e.g., shopping for less expensive car insurance).
Variable Expenses (The Controllable)
Definition: Costs that change amount monthly based on your usage and choices. These are the easiest places to find cash for your budget to balance.
Examples: Groceries, Gasoline, Utilities (electricity, water), Entertainment, Clothing, Eating Out.
Actionable Tip: These are the areas where you must track every dollar. This tracking reveals waste that you can redirect toward debt or savings.
Beneficial Links:
Ramsey: Insurance options
The Big Budget Categories (The 4 Walls)
When building your budget, prioritize expenses in order of necessity. We coach clients to focus on the "Four Walls" first, ensuring basic needs are met before addressing luxuries.
Other Good Reads:
6 Practical Ways to Spend Less and Create Financial Margin
Beyond Riches: How Essentialism Unlocks True Financial Freedom ( and Purpose)
Why Budgeting is Important for Individuals and for your Family
Actionable Step: The Expense Audit
Track your expenses for both monthly, quarterly, and annual expenses. Print out a couple months of bank or account statements and review them categorizing each charge to one of your budget line items. Gab a calendar and notate the birthdates you want to purchase presents for and holidays you want to celebrate. When are your car tabs due? Any subscriptions or memberships that are paid annually? Calculate the average monthly amount spent in each variable category. This number becomes the starting point for the expenses side of your budget.
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