Fixed and Variable Expenses - Types of Spending

Great job practicing those spreadsheet skills over the past few lessons. Those are going to come in handy as we start accounting for all your expenses. See, bills that are the same each and every time are easy to predict, like rent or your phone bill. But how would you predict expenses that change every month, like going out to eat, or bills that don't happen every month, like getting your oil changed every six months? And how do you predict emergencies which are, by their very nature, unpredictable? Believe me, money does not grow on trees. I wouldn't know. I tried to plant one. A money tree. Did not get one. Just got a dirty dollar bill. But there's good news for you. Turns out it's pretty easy to account for all your different expenses. The key is to consider them as two separate sets. Fixed expenses and variable expenses. First up, we have the easier expense to account for, fixed expenses. These are expenses that are easy to predict both in timing and in cost, because they happen regularly and they cost about the same amount each time. How you'll budget for these depends on the time period you're budgeting around. See, most bills and monthly paychecks happen on a monthly cycle. So most people prefer to set up their budget by the month. For example, I pay $60 for meal kits to be delivered every week. So every month I pay $240 for delicious fresh food deliveries. Totally worth it. For anything that occurs multiple times a month, multiply its cost by how many times it occurs. One tricky thing to keep in mind is that most months have a little more than four weeks to them. Well, except for February. That has exactly four weeks. Except on leap years. But that's only once every four years. Fun fact, I have a friend whose birthday is on February 29th, leap day. So we have a joke because, you know, his birthday date has only ever happened like eight times. We joke that he's eight years old, but he's not. He's 34. That'd be weird being friends with an eight-year-old. What was I talking about? Oh, right. Most months have a little more than four weeks. So one month I might only pay four times and the next month might have five Mondays. So I'd have to be ready for an additional charge for that month. To make it easy, just treat every month as if it has four and a half weeks. For anything that occurs less often than monthly, budget for it by splitting the cost between however many months the cycle lasts. I have my online gaming subscription set to renew every three months for $120. So I should take that $120 and split it by three. If I save $40 every month, I'll have what I need to pay for my subscription when it's time to renew. Your guided notes include some additional practice calculating monthly costs for fixed expenses. So pause the video and try those out now. Variable expenses are a little harder to account for. They're called variable because their timing and cost varies each time you pay for them. So you can't accurately predict when they'll happen or how much you'll owe. One major example of a variable expense that most people will deal with is groceries. Most of us don't buy exactly the same things every time we go to the grocery store. Nor do we make sure our groceries will last us the exact same amount of time. The price of your groceries will fluctuate and you might have to get more groceries sooner or later than you did the last time. So how do you predict something that changes all the time? One trick is to take the average from the previous times that you've spent on the expense. For example, if over the last few months I spent $380, $410, and $320 on groceries I could find the average by adding them all up and dividing by the number of months and get $370. Now if I budget $370 for groceries each month then the months that I spend less than that should even outwith the months I spend more than that. Some people like to overestimate the amount on variable expenses to budget just to be safe. For example, I know I usually pay about $100 on my power bill but I could choose to budget $150 just to be safe. Now every month that I pay less than that I get to pocket the extra cash to spend on something else or put in a savings account. This is a lot like a method of budgeting called envelope budgeting. We've got a whole lesson on that later in this unit. So if you're a little worried and you feel like you want more control over your budget pay extra close attention to that lesson. Last but certainly not least, what about the most varying of variable expenses? Emergencies. You could go years and years without an emergency and then all of a sudden a strong storm blows a branch right through your fence. Now you have to pay to get the fence repaired. A surprise fence repair can cost you a lot of money that you simply didn't budget for. How are you supposed to know that that storm was coming? That's the problem with emergencies. There is no way you can plan for the unplannable. You can't expect the unexpected. You just can't predict the unpredictable. You're not a psychic, are you? The thing about budgeting is that it's not about trying to spend all your money. No, no. It's about spending the money on the things you know you need to spend it on now and making sure you have some saved for what you don't know you need to spend it on down the road. Like an emergency room visit. No budget is complete without a line for dedicated savings. Something for the you of today to hide away for the you of tomorrow. Here you go, tomorrow, Justin. Oh, sweet! A 20! Thanks yesterday, Justin! All right, let's recap. For fixed expenses, adjust the amount you're budgeting if necessary to make sure that you can pay for them at the end of each month. For variable expenses, you can either take an average of the last few months or intentionally budget more than is necessary to make sure that you never have to worry about having enough. And finally, make sure that you have a line for dedicated savings. You need this if you want to have money for unexpected emergencies. Like my skiing accident last year. All right, I think you're ready to begin working on your budget. If you don't know where to start, check your guided notes for some helpful tips. If I don't pay my power bill, then I can't make more videos. And then I don't get to teach you about the 50-30-20 rule or envelope budgeting. I should probably do that. See you later!