Three Types of Budgeting Expenses
When starting a budget you need to be aware of three types of expenses that you'll need to budget for:
1) Fixed Costs
The fixed costs are the essential costs which consistently come out of your account every month. These are things like mortgage or rent payments, phone bills, insurance payments, etc. The great things about fixed costs is that they are usually the same cost every month, which means it is easier to set money aside for these expenses.
Although, if your fixed costs are taking up a large proportion of your budget, then you can find ways to reduce this cost. For example, speak to your phone provider and see whether you can negotiate a cheaper contract or find a better priced one elsewhere.
2) Variable Costs
These are costs which may or may not happen every month and vary every month in price. For example, expenditures like petrol or food or clothing. As these expenditures are variable, it can be harder to budget for them.
One way to manage these costs is to set a clear budget for each item (e.g. £30 a week on food) and stick within that limit. This means you can budget these expenses even if the cost is variable.
3) Irregular Costs
These are costs that happen infrequently, but still should be budgeted for. Irregular costs cover expenses such as dentists appointments, medical and vet bill, hairdressing appointments, etc. Despite the irregularity of the cost, there tends to be a general timeframe to the cost reoccurring. This helps you plan ahead and make room in your budget for these payments.
It is important to note that irregular costs are different to unexpected spends, like your car breaking down or a job loss, these expenses should be covered by your emergency fund (which we'll cover in a later post).
The first step to creating a clear budget is establishing your Fixed, Variable and Irregular Costs and how much money should be allocated to cover their expenses.
Next week, we will be discussing how to incorporate these expenses into a budgeting plan by covering three budgeting methods.