ersonal Finance (V. 2) Unit 3, Day 2 Categorizing the Leaks

All right. Unit three, day two. So last time we talked about the big picture idea of budgeting and why budgeting is important and two ways to do it, the 50-30-20 method and the zero-sum budgeting method. And today we're going to get just a little bit more technical, not anything crazy new, but we're going to take a deeper look at trying to find where money can kind of leak out of your budget and disappear without you knowing it. Um, but in order to do that, we have to know exactly what kind of expenses we are dealing with. I know she doesn't like the storm, so we have a guest speaker today. Anyway, so today we're going to really differentiate between fixed variable and discretionary expenses. I know we hit it a little bit in unit one and I know we hit it yesterday, but these are very important because if you can't categorize your budget, then you can't use it effectively. And then we're going to talk about some really common ways that money disappears or leaks out of a budget, and then you'll practice actually categorizing real-world expenses. So why does categorizing matter? Okay, if you don't categorize your budget and you don't say, okay, these places where my money is going are fixed expenses, these places where my money is going is variable so they could change every month, and these places are wants and not needs, if you don't Kind of categorize them and break them down. Then your budget is just really a giant pile of numbers. Categorization allows you to strategize a little bit. Okay, my fixed ones I know are usually tied to a contract and they're usually pretty important. So I'm going to pay those first. They're high priority. My discretionary spending is low priority. I'm not going to pay them right away. So basically the reason it's really important is it helps you get through that financial fog that we talked about last time where you're kind of really stressful because when money gets tight, You already know which items are non-negotiable and that you have to keep and which items can be absolutely cut immediately to save the money coming into your accounts. So there we go. There are two main big umbrellas of categories, fixed expenses and variable expenses. And then there's like a subcategory. So we're going to talk about the two main ones first. We're going to talk about fixed expenses, which are costs that remain the same every month. So you're going to see things like rent or mortgage or any kind of loan. So like car loan, student loan, home loan, any kind of loan. Business loan, personal loan, doesn't matter. Loans are fixed expenses, okay? Insurance premiums, doesn't matter what kind of insurance. Excuse me, health insurance, dental insurance, life insurance, car insurance, home insurance, doesn't matter. They're all going to be the same. Now people do say, wait a minute, when I backed into so-and-so and then my parents have my insurance premium went up and it will, they have the right insurance companies do to change how much you pay because you are riskier to insure. So like when you get into a car accident and it was your fault, then that means that you are riskier for them to insure. They might have to pay more money to fix your problems. So they're going to charge you more money for your insurance. But that doesn't happen unless you have to use the insurance. So otherwise, it's going to stay the same every month. And once they make that change, it'll stay the same every month after that. OK, fixed expenses are also usually contractual, which means they're usually tied to a contract or some kind of legal agreement. So think about a mortgage, right? I'll use mine as an example. I know that every single month I have to pay $1,546.65. I also know that because of a contract I signed, if I don't pay that on time and I don't pay the correct amount and I continue to do so, they can take the house from me because it's been put up for collateral. So it is usually a contractual legal agreement. Okay. And this is going to happen for big purchases. So mortgages or, you know, rent lease agreements or car loans, any kind of loan Things that have the potential to be really big and expensive. Which means they're also usually a fairly high priority for survival. So if I'm looking at my budget and I'm like, which bills do I need to make sure I pay first? I'll pay my mortgage first because I got to have some place to live. OK, so usually speaking, your fixed expenses are high priority. The nice thing about fixed expenses is that you know what they are every month. I know exactly what my mortgage is every month. I know exactly what my insurance is every month. And so they're really easy to budget for. I don't have to worry about, is it going to be more expensive this month? It's not because it's fixed. It's going to stay the same all the time. So that means it's really easy to budget for. The downside to that is that they're quite difficult to change. So, for example, when I changed from teaching one district to teaching in another district, the day I was paid on changes. It doesn't seem like it's a big deal, but when you're getting paid at the beginning And now you're getting paid at the end of the month. And your house payment is due before you get paid, that can cause a little bit of an issue. So if I try to call and be like, hey, I need to change my due date on these fixed expenses like this, it's going to be very difficult. On some of my variable expenses, they might be able to say, sure, we can move your due date for you. But on these guys, on your fixed expenses, it's probably not going to happen. So you have to come up with a way to make up that extra cash to get ahead on the bill. Anyway, the point here is that fixed expenses stay the same every month. They're usually high priority and tied to some kind of legal agreement. They're easy to budget for because they stay the same every month, but they're also difficult to change in case of an emergency. The second main category we're going to talk about is variable expenses. And these are costs that change from month to month or billing cycle to billing cycle. Again, usually when we're talking about billing cycles, we're talking about months. So that's why I'm speaking and saying month to month. Anywho, variable expenses change every month, and they are controlled by your behavior and your usage, and they do not always have contracts. So, for example, the classic one is utilities. And when I say utilities, I mean the things that keep your house running. So your water bill and your trash bill and your electric bill and your gas bill, not like gas that goes in your car, like heating gas or gas for your stove if it's a gas stove and not an electric stove. Those are utilities, and they are very commonly variable expenses. Now, is there a way where you can make an agreement with your utility provider to pay the same amount every month instead of having it vary? Yes, there is. But that depends on your. Service provider. So we almost always categorize utilities as variable expenses because they change based on your behavior. For example, when I bought my first house, I was really cool. I bought my house in the summer and my gas bill was sixty five dollars a month for June, July, August, September, October. It was great. It was fabulous. Going into November, it started to get really cold. December comes. Bam. That sixty five dollar bill goes from sixty five dollars to almost three hundred dollars. I had some sticker shock, okay? I was like, whoa, why did it change? And why did it change so much? It's because it's a variable expense. And to be fair, I expected it to go up a little, but I didn't realize it could go up that much. And so it's a variable expense because I was using the heat more. It was cold. I had on my fireplace and I had on my heaters and my behavior and usage of that service determines how much I get charged, okay? So. It's a variable expense, because of the fact that it's much more difficult to budget for because it changes every month. This is where most leaks in your budgets occur. Okay. And by leaks, I just mean like money disappearing without you quite noticing. Thank You do technically have total control here, but it requires discipline, right? you so It requires making sure that you are turning off the lights when you leave a room, making sure that you aren't leaving the AC much and the heater on when you are not even home, that kind of a thing. So, yeah, for You know, it means that when you go grocery shopping, being you stick strictly to your budget, even if maybe you don't want to eat something I'm or you want something that's a little bit more starting here. expensive in there, or you want to get like a new hair care product or something while you're at the grocery store. If you don't stay within your budget, that is your behavior that is to affecting your variable expense of your grocery bill. speak So variable expenses is most commonly where you see issues in budgets now. because it's entirely controlled by behavior. Can you control your own behavior? Absolutely. It requires discipline, though, and especially for younger people, learning that discipline takes time and practice. OK, so those are the two main big umbrellas, right? I said there were two main categories of expenses fixed and variable, and then there was a subcategory. Discretionary spending is that subcategory and it is a subcategory of variable expenses. So all discretionary expenses, discretionary spending are variable because they can change from month to month. But here's the real distinction. My electric bill is a variable expense, but it is necessary in order for me to live my life and to live in my house. I need my electric bill to be paid. Discretionary spending are purely wants. So even though they're variable expenses, they are wants, not needs. OK, they are non-essential. These are things I want that I do not need in order to survive. So, for example, my Netflix subscription every month. OK, I do not need it. OK, do not need that thing. So it is discretionary. My gas bill to heat my home. That is a variable expense. But I need it. So it's not discretionary, but it is variable. Okay, let's see. What's one that is a good one for fast food? Fast food. Okay. Sometimes when I come home from work, especially during coaching seasons, I don't feel like cooking and I want to go out to eat. I either want to pick it up on the way home or want to have it delivered to the house. I don't want to cook. And that's perfectly fine. As an adult, I can choose to use my money in that way if I would like to. However, that is discretionary. Is it variable? Yes, because the amount of times I eat out every month could change, where I'm eating out could change, whether I'm door dashing or picking it up could change, right? So it is variable because it's varying every single month. However, this is discretionary because it is purely a want. I've got food in my fridge, okay? I bought groceries this month, have food in my fridge. I could eat at home without spending that extra money. This is discretionary spending because it is a want and And not be need. Okay. And the reason that I want you to understand why you need to categorize some of your variable expenses as discretionary is because let's say something bad happens. Okay. Let's say you lose your job or there's something that's keeping you from working, some kind of medical emergency or some, some kind of crisis. Okay. Hopefully not, but it happens. It happens in life. Let's say that you aren't getting the money and that you normally are. Discretionary spending, if you haven't highlighted in your budget, is the first place you look when you need to cut stuff out and plug a leak in your finances because you need more income than outflow. OK, so discretionary, that's why it's important to categorize it, because then I can pull up my budget spreadsheet and I can say, all right, these are the things I'm not doing this month because I got I got some issues this month and I need to be able to pay all of my important fixed and variable expenses and then not necessarily by my discretionary spending. And once I have this issue taken care of, I can go back to my discretionary spending. OK, so these are things like fast food, video games, going to the movies, going to concerts, streaming services, lifestyle money, things that make your life feel better and more comfortable. But it's not essential. Wants not needs. OK. Now, the last thing that I want to talk to you about, um, is hunting for hidden charges. So where are some places that people can kind of get into trouble, um, with their variable and discretionary spending? And the first is ghost subscriptions. And I call them ghost subscriptions because they're very quiet in the way that they take your money. So think of unused apps. Okay. I have Netflix, Hulu, Peacock, Paramount, Disney plus ESPN. I have like seven or eight streaming services I don't watch them. In fact, you see all these books behind me. I read these. OK, this is just my unread bookshelf. These are all the books I haven't read yet. So I don't really watch TV. I do have people that live in my house with me that do watch TV. But I guarantee to you, we don't open all seven or eight streaming apps every month. So there are some of them that are being unused, which is just money thrown out the window. OK. I'm paying for services I'm not using. Another classic example is gym memberships, right? January 1st comes around, everyone's like, new year, new me. And they get a gym membership, which is great. Do that. Love that for you. However, a lot of times people get busy I don't and they, you know, don't fit it into their lives very well and they stop going, but they don't cancel the gym membership know and now they're paying for a gym membership they don't use. The other really big one is trials. if you I have a typo on my slide. It says treeless, but it's supposed to say trials. Any like free trial thing. can I've done this before too, where it's been like, here, try this free trial of Adobe Acrobat for seven days. hear And you can cancel anytime. me. And after that, it's $15.99 a month. Okay, cool. I'll try out this thing. It's free. Let me see if I like it. I get to using it and then I completely forget about it. And it goes ahead and charges my card because I had to give my payment information up front. I forgot to cancel it. And now $15.99 is coming out of my account every month and I might not catch it for a while. So that's where a leak in your budget can come from. The other one is convenience fees. Delivery app markups is a big one. I actually was looking at DoorDash today because today was one of those days where I was like, I don't really feel like cooking. So I was looking at DoorDash and I could have gone and picked up a meal. For like eight or nine bucks, but because I wanted it delivered to the house and there was the delivery surcharge and then there was the restaurant fee and then there was the 99 cent delivery app and then there was the driver tip and then there was the taxes and then there was X, Y, and Z. That eight or nine dollar purchase turned into almost $30. OK, and you don't notice it at first because it just tells you, oh, it's just this small fee and then it's just this small fee. And it's not until right at the very end where you check out that you realize you spent way more than you probably wanted to or way more than you budgeted for. So that's that's a hidden fee kind of thing. It's not really hidden, but it is that can really impact your budget. The next one is service fees and service fees can be anything. They can be like an out of network ATM charge, like it says on here. So like if I'm visiting my siblings in Denver and I want to go to an ATM and take cash out of my checking account. There isn't a First Interstate Bank ATM down in Denver where my siblings live. So I have to use just a general ATM at like a Walgreens or maybe one of their ATMs at their banks. And it's fine. I can still access my money, but it's going to charge me a three dollar charge in order to use their ATM because it's not in the network with my bank. Another one is. Service fees for paying bills or like using a credit card. Right. A lot of times credit card companies will not credit card companies, but processing companies will charge businesses like a three percent fee or something to run all of the customer cards. And so the business will pass that on to the customer. So sometimes you could save money if you pay in cash instead of swiping your card. For example, the city of Riverton bill, when I go to pay my trash and my water. Let's say it was $150 this month. I could take $150 down in cash to City Hall and pay it that way and have no fee. But I like to pay it online. On my computer in the comfort of my own home. I don't have to leave. I'll just put in my debit card number, boom, done. It's going to charge me a dollar 99 service fee to process that card. So that was a convenience fee. It was for my convenience. I didn't want to have to leave my house. I wanted to get it done right now. And I had to pay an extra dollar 99 for that convenience So those little fees add up. Keep track of them. The last one is daily impulse buys. And these are the ones people always tell you about, right? Don't get a coffee on the way to work every morning. And you're like, yeah, yeah, okay. My coffee is not killing my budget. But it might be like, if you don't have a lot of wiggle room and you don't have a lot of money coming in, those small daily purchases can really add up. You know what I mean? Like if you're buying coffee or breakfast on the way to work every day or most days on the way, or if every time you stop for gas, you have to get snacks or a drink or a lottery ticket or something, right? Like those daily impulse buys, they are really small at the time, but they can add up. So anyway, now that we're done talking about that, here's what you're doing. Make sure that you complete the guided notes section for today's video lesson in your Unit 3 workbook. And if you need help with anything, you need to let me know. You can email me. You can come and visit me at my desk. I can work through stuff with you. But you have to advocate for yourself, which means you have to say, I need help and I need support. You need to tell me that you need support, and I am more than happy to provide it. But if you do not tell me there is a problem, I will assume there is none. Okay and then before you leave today I need to do a check-in with you and the way that we do that is you take the sticky notes at the front of the room and you answer these four questions. What specific topic did you learn about and work on today either through the video or through the workbook? Number two, which exact section or assignment did you complete today? Did you only work on section one of the workbook? Were you working on section four, two? What did you do today? Number three, what is the exact goal or thing that you want to accomplish tomorrow in class? And then number five, is there a specific question or like math step if you're doing the math that you feel stuck on? You might not and you can just say, I feel fine for today. I don't have any questions. And that's fine. But if you do have something that you need help with, Put it on here and come ask me. All right, I'll see you in the next video.