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Organize Expenses in Your Budget

With the right budget categories, it’s easy to cut back and stay on track.

A budget can’t be static if you want it to be effective. Your budget should be able to adjust as needed to meet your financial goals and the challenges you face in any given month. This allows your budget to be flexible enough that you can consistently maintain financial stability and avoid problems with debt.

Of course, there are many ways to arrange a budget. Some people prefer to break expenses up between types of spending. This means you have general categories, such as food and transportation. While these categories can be effective for evaluating where your money goes, they may not tell the full story.

Organizing your budget effectively to maintain stability. A good budget categorizes expenses, keeping them organized.

The base level of your budget houses fixed expenses. These expenses come first because they’re things you need to survive. This includes rent or mortgage payments, HOA fees, insurance, student loans and car payments. The cost for each fixed expense generally stays the same. However, changes may occur annually. But beyond these annual changes, fixed expenses are usually easy to plan around.

The next level of your budget houses all of your flexible expenses. Flexible expenses are also things you may need to survive, but they have no set cost. As a result, they can get too big to fit into your budget unless you monitor them closely to avoid overspending. This can make flexible expenses trickier to manage because they fluctuate. And some months certain flexible expenses may not show up at all. While it can be harder to control these expenses, they’re also easier to trim down if you need to cut back.

Finally, the top level of your budget is where all the nice-to-haves live. This is your discretionary expenses. This level includes everything from entertainment and subscriptions to tithes and trips to the gym or salon. As tough as it can be to kick these out, you can live without them, if necessary.

As you take stock of discretionary expenses take note of every incidental that may be hiding out. This includes things like your “cappuccino” factor – that’s the $3.50 you spend on specialty coffee each morning. That expense may not seem like much, but it adds up to nearly $1,300 a year! So take note of these small incidentals to make sure they fit in your budget and if they don’t, they have to go.

For more advice on budgeting, visit ConsolidatedCredit.org.

Why fixed, flexible and discretionary matter

There’s a reason why we recommend using these three big blanket categories to organize expenses. It makes it easy to prioritize bills and other costs in your budget. It also gives you any easy means of cutting back by specific amounts. So even if you’re using a budget application that sticks to expense types, it’s a good idea to take the extra step of noting these three categories as well. Here’s why…

Let’s say you have a tight budget month coming up. You have a car repair to take care of and 2 pets to take to the vet for annual checkups and shots. Both are flexible expenses, meaning they count as necessities that you don’t want to skip. But what do you cut to fit these increased costs in?

If you have your budget organized by fixed, flexible and discretionary, you immediately know where to start. You look at the nice-to-haves first and cut what you can afford to do without for the month. You can also look at your other flexible expenses to see if there’s something you can put off for another month. For instance, you can cut your clothing budget for the month.

If you only have your expenses organized by type, this can be more difficult. For instance, your FOOD budget may cover both groceries (a flexible expense) and dining out (a discretionary expense). By dividing these two types of food costs out, it’s easier to evaluate how much you can afford to cut back.

Type vs. Category

Many types of expenses besides FOOD cross these three main categories:

  1. Transportation expenses generally cross Fixed and Flexible expenses: Your auto loan payments and car insurance are fixed expenses. Meanwhile gas, maintenance and repairs fall under flexible expenses.
  2. Housing costs are also divided up between Fixed and Flexible. Rent or mortgage payments, HOA fees and homeowner’s insurance are all fixed expenses. Home maintenance and repair as well as housing supplies are flexible. For some, Housing may also include a discretionary expense for something like decorating or landscaping.

Different types of expenses may also be categorized differently depending on your needs at any given time. For example, your clothing budget as mentioned above may be categorized as a flexible expense. This is true if you have items you need to buy for work or for your kids to attend school. Your family can’t go without jackets in the winter. That makes clothing a flexible expense.

However, if you like to shop or engage in retail therapy, then much of your clothing budget may not be necessary. In this case, clothing becomes discretionary because you shop without a defined need to buy a specific item.

The changing categories of credit card debt

Credit card debt is another expense that can switch categories, depending on your financial situation. If you pay off charges in-full at the end of each billing cycle, credit card debt payments are a flexible expense. The debt is necessary to pay off, but the cost changes based on how much you charge each month.

On the other hand, if you have outstanding credit card balances that you want to pay off quickly, it’s better to make credit card debt repayment a fixed expense. You determine how much money you can afford to put towards debt elimination each month. Then you set this amount as a fixed expense in your budget. The amount you pay to each bill may vary, but the total amount you have remains fixed until you reach zero.