I realize you may still be tracking your expenses for the next month, but I’ll go on with the process of creating a budget so you know what to do after you’ve tracked for a month. There are two different types of expenses that any purchase will fall under, either a fixed or variable expense. This article will cover the fixed expense categories you will most likely have in your budget.
The definition of a fixed expense is something that costs a certain amount of dollars every month. This doesn’t mean that it never changes, but it shouldn’t change more than about once a year. These types of expenses are very easy to budget and account for because they rarely change. Even though they may be easy to budget for, they can still get you into trouble because it is very tough to save money in fixed categories after you commit to them (i.e. you can’t just “save” money on your mortgage payment after you’ve bought a house). I’ll go over a few of the most common fixed expense categories and give you guidance on how much you should be spending in each of those categories.
This is most likely going to be your largest category every month, which makes it one of the most important. A question that everyone must answer for themselves at some point is, how much should/can I spend on this category? Many people view their living situation as a status symbol (same as cars). It is commonplace, in our society nowadays, to always want a bigger or better house. This is fine and dandy, but you need to make sure you can afford it.
In order to buy a home, you must be pre approved by a bank. They pre approve you for a certain amount (i.e. $210,000 house) and many people take this as being what their max budget should be. I disagree with this method because normally the pre approval amount would result in a monthly payment that would be too high. In order to know what you can afford, take your monthly net income (calculated in Step 1) and multiply it by 0.25 (or think of it as 25%). Whatever that amount is (i.e. $4,000*0.25=$1,000) should be a good guideline to go by for what your monthly mortgage or rent payment should be. If you need to go a bit higher than 25%, that’s ok, but do not go any higher than 35% of your monthly net income (i.e. $4,000*0.35=$1,400).
Many people have some sort of monthly loan payment whether it be a car loan, student loans, etc. These are almost always a set amount per month which make them a fixed expense. The problem with loan payments is that there is really nothing you can do to save money on them (outside of consolidating or refinancing, which won’t help much). The only thing you can do is budget for the exact amount of your loan payments and write it off as a monthly expense. Your goal should be to pay these off as soon as you can (I’ll write about Dave Ramsey’s 7 Baby Steps soon) and avoid them in the future so that your monthly budget is not restricted by fixed loan payments.
Being that car insurance is mandatory if you own a car, I assume almost everyone will have to have this category in their budget. I know that your rates may change (every 6 months or year), but this is fixed enough to put it in this category. A few suggestions I have to save money on car insurance is to shop around, raise your deductible and bundle it with your homeowner’s or renter’s insurance.
One note of caution: don’t always go with the lowest priced insurance. Having an actual agent you can call at any time is worth a little bit more in my opinion. You can also lower your payment by raising your deductible, but make sure you have enough in savings to cover this deductible. Bundling can also save you anywhere from 5-15% on average. Putting all of these together can end up saving you quite a bit monthly.
Being that you normally sign 1 or 2 year contracts for all three of these items, they fall under fixed expenses. Even though they are fixed, this does not mean that you cannot save money here. It is important to make sure you can afford each of these before you sign the contract because there is normally a hefty fee if you need to cancel for any reason.
After owning a home for nearly 2 years, I can personally attest that these three categories are where you can get screwed over the most. Many times you will have all 3 of these bundled together through the same company. Also, you probably signed up with a new customer deal that expires after 6 months, a year, or two years. Once the deal expires, your costs may go up by as much as 100% or more. I’ve learned you can keep these costs down by contacting the company at the end of your promotional period and they will end up giving you another deal (normally at a very similar price to what you were paying). Also, make sure to check your monthly statements because I have found about 6 errors (always in the company’s favor, not mine) that they corrected after I contacted them about it. This has saved me about $150.
I know this fixed expense list is not all-inclusive, but these are the main ones that the majority of people will have in their own budgets. Fixed expenses may be the easiest to budget for and track, but they can be the categories where you can save the most money. Also, because they are “fixed” it is essential that you make sure you can afford them before you commit to them.
Hopefully this gave you some more information on fixed expenses with some tips on how to save money on them. We’ll be discussing variable expenses on Wednesday.
What other fixed expenses do you have? Also, do you have any suggestions on how to save money here?