Creating a Budget: Classifying Expenses
Now that you have spent some time tracking your expenses, the next step in the budgeting process is to sit down with that data and begin to organize your expenses. This may seem like a daunting task but it can be broken down into sections.
With your list of expenses, begin to organize them into the two main categories: essential expenses and non-essential expenses. Your essential expenses are the items that are required for daily living while the non-essential expenses are the items that many consider to be luxuries.
Within the essential expenses, you will see that you have a few different variations. There are fixed expenses, which are the same from month to month, that include rent or mortgage payments, car payments, car insurance and tax payments. Some of these fixed expenses will be irregular, which means they are not paid every month but can be budgeted for on a monthly basis.
In addition to the fixed expenses, there are variable expenses that are essential. These are expenses that fluctuate from month to month and include items such as your heating/cooling, car maintenance, gasoline and possibly groceries.
Non-essential expenses include things that are typically classified as “wants” as opposed to “needs” and is often the area where people spend the most money. This category includes items such as cable television, high-speed Internet access, eating out at restaurants, gifts, cell phones, daily coffee, etc.
Often times people will try to rationalize the fact that these expenses are essential. While there may be cases where that is true, usually it is just an excuse to try and justify the expense. If you feel one of these items is absolutely essential, classify it as an essential expenses.
Why is this important?
Are you wondering why it is important to classify your expenses in this fashion? By breaking down the data into manageable pieces, the process of creating a budget becomes easier and is less likely to scare you away.
Too many times people without a spending plan are spending more money than they earn and this can be an alarming realization if you fall into that group. However, by taking the time to classify your expenses as essential and non-essential, you will know where you can eliminate expenses if your outgoing funds exceed your incoming funds.
In the next installment of the budget creation process, we will examine the process of categorizing your expenses and making your first rough draft of your spending plan.