So you’ve started to make money. First of all– good for you. Secondly, what are we spending it on?
Let’s break this down. Getting and spending money sounds fun (and hey, a lot of the time, it is), but it’s stressful too. Budgeting is no easy thing. As much as we’d love to splurge on LuLulemon, the fact is you have to be wise about spending; otherwise, you risk tanking your credit score.
No one wants that—literally nobody.
Lucky for you, there are only three major types of expenses. By breaking these barriers down, you can get a better grip on where your money should go monthly.
What is an Expense?
Let’s not get too ahead of ourselves. We’re not all masters of our craft here, so how do we define expenses– and why do we worry about them?
The “expense” definition is: “The cost required for something; the money spent on something.” And that’s on Oxford. (You go, girl).
By this definition, a monthly expense is a required payment you must make monthly– think Netflix or Spotify. But expenses aren’t just the fun things. Often, our expenses are the debts we don’t want to pay: a mortgage payment or a student loan. If you don’t pay these expenses, your bank account is at risk.
Clearly, they’re essential.
Breaking Down the Three Types of Expenses
Expenses break down into three major categories. Check this out.
- Fixed Expenses
- Periodic Expenses
- Variable Expenses
Don’t fret. We’re not expecting you to know any of this off the bat. Let’s go through each and determine why you’ll need each expense.
There’s no way out of a fixed expense. These are the expenses that you just have to pay. Let’s consider a few prime examples:
- Rent or mortgage payments
- Renter’s and home insurance
- Car Payment
- Internet payments
- Property taxes
If you don’t pay these, you risk losing your property. (And hurting your credit score). None of us want to sit in an apartment without lights, internet, or a working vehicle, so they’re essential.
Thankfully, fixed expenses arise month-to-month, meaning they’re predictable and easy to plan around. Factor them into your budget plan – whether you use a spreadsheet or an app – to ensure you have enough money to cover them.
Now, periodic expenses are trickier to plan around. These expenses don’t occur every month – but can happen quarterly or over a spread of months.
Here’s the rub: periodic expenses are also necessary. They’re just more infrequent. You’ll understand when you see these examples.
- Tuition and classes
- School books
- Car maintenance
- Car registration and insurance
- Holiday spending
It’s easy to take your car for granted until your engine putters out on the side of the road. While you can push these expenses off for a while, they’ll come sooner or later, and you’d be wise to plan for them. As much as we’d like to tell ourselves we don’t need those school textbooks – you need those school textbooks.
You’ll be happy to know we saved the best for last.
While fixed and periodic expenses are those you need, variable costs are those you choose. That’s right; this is your AMC Pass, your Nordstrom Rack, your late-night Taco Bell. We’re talking earrings at TJ Maxx; Tikka Masala at Trader Joe’s.
As the consumer, you get all the control over these expenses. So, rather than strictly planning, you can be more flexible with this. Are you making less money this month? Pull back on your variable expenses – hit the movies one less night, or leave that dress on the rack.
But let’s be honest: the reason we pay our expenses is so we can have fun on the side. While you shouldn’t blow your checking account on red, it’s essential to go out and make your money feel like yours. Life is about living, and there’s no way to do that without a bit of you-spending now and then.
How to Budget
All our expenses come down to one thing: budgeting. When it comes to money, you can’t fly by the seat of your pants.
If you spent too much in the variable department and feel nervous about checking your Wells Fargo app, do it. It’s always better to know how much you have and plan around it.
We recommend making a monthly budget. You can plan all your payments in advance by creating a balance sheet. While it’s easy to let periodic expenses slip through the cracks, do your best to follow all your costs.
Paying Expenses Off With EXTRA
Between your variable, periodic, and fixed expenses (not to mention your savings accounts, emergency funds, and credit cards), figuring out where to put your money takes a lot of work. A lot of it comes down.
The best you can do is plan, plan, plan. Everybody’s financial statements look different, and there’s no shame in whatever path you’re on. When you create a budget with your net income and debt payments, you can start to plan the best means of spending for you.
Follow EXTRA for the best budgeting advice. We’ll teach you what your credit card balance means and how to keep setting up your financial future.
Finances are a long, complicated road, but they’re worth it. Think of all the benefits – the Jamba Juice, the late-night Doritos – and march on.