Budgeting 101 – Part 2 of 5
Budgeting 101 – Part 2 of 5
In Part 1 of this series, we discussed life’s expenses down into Monthly, Annual, Lumpy and Catastrophic expenses. In Part 2, I am going to deal with monthly expenses.
Monthly expenses should be the most predictable of the expense categories. They happen every month. Some are fixed, and some are variable.
With your household income, you should be able to cover these expenses, including covering seasonal variations comfortably. If you have nothing left over at the end of the month after paying monthly expenses, then you have no money to deal with the annual and lumpy expenses, “This is not a good situation”.
Required monthly expenses are food, a place to live and transportation for work so you can earn income, these are necessary living expenses. Each of these expenses has a broad range of costs, depending on how you manage them.
Cost of Food
If you plan and cook your meals, shop for bargains, use leftovers for lunch and stay away from pre-packaged and prepared foods, you will likely have the lowest food costs.
If you eat out a lot (including buying coffee and lunches), buy pre-packaged and prepared foods and give your kids lunch money instead of lunches, you will likely have the highest food costs.
If your Cost of Food falls in the latter description “Highest Food Costs”, this is a manageable expense that you can quickly change and positively impact your costs.
Living and transportation expenses
These expenses can be more challenging to manage. The key here is not to over-commit in the first place. Once the commitment has been made, it can take a long time and be challenging to reduce these expenses. In the interim, your finances may be stretched.
For example, when you buy a higher-priced vehicle when a lower-priced one would do. As the axiom goes, the car is worth 20% less as soon as you drive it off the lot. So, if it is a fully financed or leased vehicle, it will be very difficult, if not impossible, to get out of the obligation once you commit to it.
Buying a vehicle is a significant decision that should not be made quickly and must be well thought out. Be disciplined, take the emotion and impulse out of the decision and focus on the practicality. What do you need for a vehicle, and then what are the cost options for that vehicle. You should use the same decision process when purchasing a home or renting an apartment.
Having cash left over after paying your monthly expenses is very important in managing your finances effectively, and it will give you great peace of mind. Maybe you won’t have what the Jones’ have, but you will sleep better at night.
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