Budgeting or Cash Flow Planning can be frustrating, especially if you don’t understand how to adjust for the variability of your expense categories. When I work with clients, I always try to teach them how to turn the variability into a fixed and firm expense. This does not mean that variability won’t still exist, but if you understand the mechanics behind the different types of expenses, the easier it will be to build out your monthly plan. There are three types of expenses that we need to include in our budget but find a way to treat each as a fixed amount.
The first type of expense is “Fixed”, so no adjustment will need to be made since it is the same amount every month. Typical fixed expenses are your mortgage payment, car payment, cable bill, cell phone bill and any other expense that does not change over time. These are very easy to program into our monthly plan.
The second type of expense is “Variable”. Variable expenses can and may be different every month. This type of expense includes; groceries, eating out, entertainment, fuel, utilities and other expenses that are hard to calculate month-to-month. Many of these variable expenses can be turned into a Fixed expense by setting a limit for the ones that are controllable. Controllable expenses that are variable are groceries, eating out, entertainment, etc. Decide in advance how much you want to set aside for these controllable items then track these specific categories to make sure you don’t go over the pre-set limit. Other variables like utilities and fuel consumption can be somewhat fixed by calculating the average spent over a six month period.
The third and final type of expense is the “Periodic”. These types of expenses are the ones that get most people frustrated and causes severe challenges with monthly cash flow planning because most people don’t plan for them. A periodic expense is an expense that does not occur every month but will occur at some point in the future. There are many different varieties of periodic expenses and planning for those expenses is critical for proper budgeting. We often fail to look into our future to determine what our monthly allocation should be for a future expense. Christmas, which happens every year, is one periodic event that many people will wait till Thanksgiving then wonder how they are going to pay for it. Many of us have a water and sewage bill that comes due every quarter, so most people will try to pay it in full from their earnings they received the month it is due. To properly plan for a periodic expense, it is best to calculate the cost of the expense, then divide that cost by the number of months remaining before the expense comes due. That calculated amount will be the monthly set aside for the upcoming periodic expense. Once you do this for every periodic expense, your budget will become more consistent and less variable making it easier to plan.
When you stop and think, are their ever really emergencies? Do we really not know that tires on a car have to be replaced every 4 years? Do we really not know that Christmas comes every year on December 25th? Does car maintenance just pop up out of no where? In life, it’s not a matter of IF it’s going to happen but When is it going to happen. Understanding this concept was so important to my financial health and it got me to a point where I don’t need a credit card for “emergencies”. Can we predict everyone, of course not. But having that intentional mindset of what to plan for can sure eliminate most of these out of the blue “emergencies.”