In this article, I define fixed and variable expenses, providing examples for each category; I share the method I use to budget for my variable expenses; and I provide free budgeting templates that you can save to your Google drive and modify to fit your needs.
So far in this series you have learned why a budget is important in the big picture of your life; located the login pages for all of your online accounts and centralized them for easy future access; updated and recorded your login information, so you never again have to waste time resetting your passwords; and set up a system for tracking your e-statement notifications, ensuring you will never again miss a payment due date.
Now it’s time, finally, to start dealing with actual numbers!
The 4 Main Budgeting Categories
Think of your finances as 4 main categories. Within those main categories, you can have any number of subcategories—how many depends on your life and financial situation. Here are the 4 main categories with a few examples of subcategories.
1. Fixed Expenses (or “Bills”): rent, credit card payments, monthly debt payments, mortgage, all types of insurance, phone and internet, monthly activity fees, utilities, bank account service charges, subscriptions…
2. Variable Expenses: groceries, fuel, pet-related purchases, children-related purchases, household supplies, dining out, cigarettes/alcohol, coffee/treats, lunches…
3. Savings: emergency fund, vacations, holidays, birthdays, yearly subscriptions, annual credit card charges, back-to-school, clothing, seasonal/occasional expenses…
4. Debt: list of the debts you owe (credit card or otherwise), including the interest rate, minimum monthly balance, total balance, and date you acquired the debt (if you have it) for each debt. Minimum monthly debt payment should be listed in fixed expenses, but a detailed list of all the debt, including the balance, is mandatory. When you have money “leftover”, after accounting for categories 1-3, then you can look at this list and decide which debt you want to prioritize to pay off first. Then, just throw all ‘excess’ money at that debt each month.
Bonus category: Investments, such as stocks or real estate. I consider this a bonus category because you should have the 4 main categories nailed down solid before you consider investing your money in speculative areas. Listen: putting money in savings for an emergency fund is an investment in the security of your future, and it’s a good idea to have a minimum of 6 months’ worth of living expenses (fixed and variable!) saved up. That being said, if the stock market is an area of investment that interests you, make sure you have the right mindset.
When planning your budget, you should start with fixed and variable expenses.
Because you don’t know how much money you have to save or pay off debt if you don’t know how much you’re spending to pay the bills and feed your family.
Budgeting for fixed expenses is relatively straightforward because, with few exceptions, much of the decision-making process is out of your control. You are told how much to pay, and you pay it.
But what about variable expenses? The onus is on you to restrict your spending if you want to save money. Most budgeting advice I’ve come across encourages people to set an amount of money for each category and try their hardest not to spend any more than that.
While this approach may work for some highly disciplined or motivated people, I actually think it’s exactly the opposite of how you should approach budgeting, especially when you’re just starting out.
The reason for this is because we humans have a tendency to set higher expectations than we’re capable of achieving over extended periods of time. We overestimate our capacity for future self-control and discipline, especially when we have little experience with either.
If you make a plan on how much money to allocate in each subcategory without considering your current spending habits, chances are you are setting yourself up for failure.
In this article, I will show you how to 1) collect data to understand your spending habits: what you’re spending your money on and how much and 2) use that awareness to incrementally adjust your spending habits to, over time, be more in line with your budgeting goals (while still accounting for the fluctuations of life on a daily, weekly, and monthly basis).
Included for free are the google document templates I use. Save the documents to your drive (“file” -> “make a copy”), and you can modify them to suit your circumstances!
1. Fixed Expenses
If you have been following this series, you have already identified your recurring monthly payments. Just open your finance folder and put the information into the table.
After debt, this is the category we have the least control over. That being said, we do have some control.
If you wish you were paying less for this category, ask yourself if there are subcategories you could cut back on or eliminate. There a bills (ex: rent, utilities, insurance..) that are beyond our control, but could you save by choosing a cheaper plan for your internet or phone? Are there subscriptions you could do without, even for a few months or a year?
There’s no need to take action just yet, but let the thoughts and ideas come to you.
2. Variable Expenses
I like to designate the ‘ideal’ amount of money I wish I were spending in the categories, and then save my receipts to see how much money I am actually spending.
A. Save every single receipt for every single purchase
I think it’s a good idea to do this for TWO FULL MONTHS before you decide to relax your vigilance.
Well, life varies and fluctuates! No single day is alike, let alone a week or month. If you track your expenses for 8 weeks, you can accumulate enough data to garner an accurate picture of what your expenditure habits are like and how they fluctuate week to week. With that, you can have a more realistic and humble idea of how you’re actually spending your hard-earned money.
As you become aware of your spending habits, you can work on slowly cutting back spending here and there until you reach an amount you’re pleased with. This method is much more manageable than setting up the ideal amount from the beginning and constantly worrying that you’re unable to “stick to it.”
Find a convenient place to stash receipts immediately upon purchase.
(I suggest an alternate method for those who only have a wallet they keep in their back pocket, so read on if that’s the case for you!)
Find a little bag (or buy a super cheap one) to hold your receipts. I recommend getting a little bag rather than an envelope for a couple reasons:
i. It will weather more wear and tear than an envelope, so you don’t have to worry about changing it out every few weeks
ii. It will hold more receipts with less hassle
iii. It zips up, reducing the risk of losing receipts
iv. You can store a Ziploc bag containing a pen and little slips of paper for the purchases when you either forgot to get a receipt or a receipt was not available to you.
If you use a vehicle to get around, keep the bag somewhere easy to access when you enter your vehicle (for example in the middle seat console or under your seat).
If you have a purse that’s large enough, put the bag in with your wallet. If your purse is not big enough to conveniently accommodate the bag, then either just use the Ziploc bag to carry the pen, paper, and all your receipts and keep that in the main pouch; or designate a zipped pouch in your bag for the task.
If all you have is a wallet you carry around in your back pocket, you can keep all your receipts in the same place as your money bills. The only caveat for this method is that you will want to process the receipts on a daily basis to avoid having your wallet resemble a receipt-jungle. If forget a receipt (or one was not available to you), make a quick note to yourself in your phone. I send myself messages in Messenger, but do what’s quick and easy for you. Just don’t forget to check the notes when you’re processing your receipts!
B. Process your receipts daily or weekly.
Use the daily expense tracker for this step. I recommend that you process your receipts every day for the first week or two. After that, weekly should be fine. Obviously, though, do what you think works best for you.
Step 1. Record the Purchase
Take the receipts out from wherever you’ve stashed them and write down the purchase in the daily expense table, keeping track of which account you use and updating the balance after each purchase.
Don’t be too obsessive about this step. As you can see in the image above, not all of my purchases are in chronological order. I purchased a few items online and forgot to record them. What matters is that you do record the purchase, even if it’s after the fact.
Step 2. Label the Receipt
On top of each receipt, write the subcategory the purchase was for. It can be more than one category per receipt, of course!
When I purchase for more than one subcategory on the same receipt, I like to break down the total, accounting for taxes, per subcategory so I can keep track of the respective totals in the expense tracker. Again, do what you prefer here.
Step 3. Relocate the Receipts
If, like me, you process your receipts daily or multiple times a week, then you will want to keep the processed receipts separate from the unprocessed receipts.
I put the processed receipts in a Ziploc bag, and I store that bag at my desk, which is often where I am when I take care of my household finances.
When the week is over, I go through all of the processed receipts. I make sure I recorded everything I wanted to (you could go quite in depth with the statistics, if you wanted to). I file away receipts I need to keep for other reasons (taxes, product guarantees…), and I throw away the rest.
C. Track your expenses over time
I break down my variable expenses by the week within their monthly budget cycle. This way, I can see how my spending varies from week to week and from month to month.
No single week or month will be identical, and this way I can observe patterns. I can see, at a glance, how my spending varies depending on what is going on in my life and I can adjust my future budget accordingly, rather than having one rigid framework I try to impose on all of my cycles of life.
Feel free to download all of the forms I have provided. Make the adjustments you need to make them fit your circumstances. I hope this helps 🙂
Trying to impose monetary restrictions on yourself the moment you start trying to get your finances “in order” is akin to purchasing a year-long gym membership as per your New Years Resolution of getting your health “in order.”
You know how that will play out!
Why do you expect your self-control over your money to be any different than the self-control over your physical health?
You don’t determine how much you’re spending off the top of your head on the night you’re sitting down to do your finances.
Spend time observing yourself: how much are you spending, and what are you spending it on?
Take the personal and subjective out of it. This is math and science, not creative writing. Take the guilt and judgment out of the equation, they will only hinder you. Collect the data, and you will get an accurate overview of your current spending habits.
It may not be pretty, and it may not be what you wanted to admit, but it will be the truth.
And you can only improve your finances and your life if you are willing to look at the truth and accept it.
Good luck to me and you.
Head over to the series masterpost to start the series from the beginning or to find a specific article within the series.