Expenses

Nearly every financial management program addresses expenses by first explaining the difference between wants and needs. I don’t. If you’re a committed shopaholic entranced by the ultimate, light-weight, bait-casting fishing reel, you neither want nor need some sort of touchstone scale to determine whether you want or need it. You will more likely benefit from a system of tracking your expenses so you can pay for extras without wasting your hard-earned dollars on late and overdraft fees.

So, just as we tallied your income sources, we will gather your expenses. These include your spending, giving, investing and savings. If you’re feeling like an over-achiever, you can save yourself from revisiting these statements later and track down the interest rates you’re paying on credit accounts at this time, too. Or, you can slip your statements into a file to pull later. For now, we want to track all of your bills, their due dates, minimum payments, and total outstanding balances. The chart below will help you organize your expenditures.

Checklist: Expenses

Gather your statements for:

• Auto loans and insurance
• Mortgage, homeowners dues, homeowners insurance
• Utilities
• Health & life insurance
• Student loans
• Credit cards
• Bank loans
• Entertainment
• Groceries
• Other

How Do You Spend Your Money?

Expenses break down very nicely into four categories: Spending; Savings; Giving; Investing. Each of these can be subdivided into your wants and needs. Use the table below to see how your spending breaks down.

	Want	Need
Spending
Saving
Giving
Investing

Money Tool: Expense Tracker

With the Expense Tracker below, each bill is accounted for, to create a snapshot of where your money needs to go. It also illustrates how often each of your bills needs to be paid.

Money Advice: Fixed & Variable Expenses

Some expenses are the same month after month. As long as rates aren’t increased, you can count on exactly how much you’ll be spending on rent, insurance or auto loans. These are considered fixed expenses.

Variable, sometimes called “flexible,” expenses are trickier. Utilities change with the seasons, telephone bills can rise depending on use, entertainment expenses fluctuate depending on frequency and form.

I recommend shifting as many variable expenses as possible to fixed expenses. The easiest place to do this is probably your utility bills. Most utilities offer “level payment plans” that project your usage for the next 12 months based on past usage at your current address. Using this projected usage, they divide your monthly payment into 12 level payments. For example, if your anticipated bill for the next 12 months is $840, the utility will calculate $840/12 = $70. Your monthly level payment bill would be $70.

For bills that cannot be put on a level payment basis, like groceries, clothing or personal care, you may have to use your best estimate for monthly expenses. It’s OK to err on the high side with these. You’ll be setting up accounts for them later that will allow you to save money in lower-spending months to meet the expenses in higher-spending months (like back-to-school shopping or when Johnny outgrows his basketball shoes halfway through the season).

Checklist: Level Payments

Check into the availability of level payment plans for your:

• Electricity
• Natural Gas or Propane
• Water
• Satellite TV or Cable
• Telephone
• Internet Service

Electrical Use Profile

My utility bill includes an Electric Use Profile. Although shown in kilowatts here, according to their records, I could Level Pay at about $116.50/month, in a year when my annual cost was $1,398 and my monthly bill swung from $99 to $210.

Money Wisdom: What Do America’s Forefathers Say about Money?

On the Friday before Memorial Day weekend, my nephew nearly cut off his pinkie. Ben is 11 years old and a good boy. So good, in fact, that his injury was the result of a dishwasher-unloading accident. It turns out this is a pretty common wound when knives are loaded handle-down, and the unloader grasps the blade instead of the handle. In Ben’s case, the knife severed a tendon, which, combined with complications from being unable to secure a surgeon on a holiday weekend, resulted in three hours of surgery, many follow-up doctor visits, and extended physical therapy.

Seeing the various stages of stitches, wrappings, stitch removals, and braces that Ben posted on Facebook made me think about how vulnerable we can be to unanticipated variable expenses. Even the Budget Calculator used to assist people applying for federal student loans does not include health care, one of the most difficult-to-anticipate expenses. What are our options when these small leaks spring in our checking accounts? Can we identify the most vulnerable areas in advance and prepare for potential hurricanes?

As you estimate your variable expenses, consider those that may leave you financially exposed and boost your annual estimate a bit. When you divide your annual estimate by 12 level monthly amounts, you could make an unforeseen disaster a little less painful. (I wouldn’t be surprised if Ben now wears oven mitts for his new dishwasher duty.)

Unanticipated Expenses

We all have horror stories of how our carefully stacked house of cards was toppled by one unexpected disaster.

My earliest involves a chocolate 1977 Mustang and a tiny radiator leak that erupted into a geyser in a school parking lot when I was going to a job interview. I became great entertainment for a group of children at recess, with my car doing its best imitation of Yellowstone’s Old Faithful, hissing and spraying water all over the pavement. I was late for my interview, and as one of the universe’s crowning touches, the school’s sprinkler system suddenly activated and soaked me in my suit as I entered the building.

I did not get the job.

If I’d fixed the leak when I first became aware, it probably would have cost me $15.

Money Tool: Average Annual Expenditures

The U.S. Bureau of Labor Statistics (2008) reckons the average annual expenditures for one person at $30,120 spent from an after-tax income of $31,798 (Consumer Expenditure Survey Table 4).

Every household’s expenses differ and are unique to their particular life stage. But it can be eye opening to see how other U.S. citizens’ average annual expenditures compare to ours. The table below compares data derived from the Bureau of Labor Statistics (2008) to the budget percentages recommended by the government’s Direct Loan Service Center for students applying for federal student loans. It’s pretty clear that using averages to estimate your expenses is not ideal. Not even close:

Early in your adult life, you may be responsible for only a few of these expenses. When you’re in high school or college, you may have a small income devoted primarily to your car (transportation and insurance), perhaps a savings account for education (misc.), and pocket money (food and personal items). Until you become more financially stable, you may find it easier to take on expenses in small pieces, living at home until you’ve become responsible for your own car payment and insurance.

Practicing how to spend money can help you develop the financial experience (and bank account) to avoid becoming heavily unbalanced in a particular category later in life. For instance, you’ll be financially at-risk if you take on a housing expense that represents 70% of the family income, especially in earlier adult phases of life.