From the previous stated equation: INCOME = EXPENSES + DEBT + SAVINGS.
In common usage, an expense or expenditures are an outflow of money to another person or group to pay for an item or servicer for a category of costs. It is almost impossible not to have expenses. Expenses are a part of life. One universal rule that can be used to keep expenses under control is to buy or obtain needs instead of wants. How often do we go shopping with a specific item in mind at a specific price and see an item we want at a higher price with more bells and whistles on it. This happens often with cars. Many of the modern cars have so many gadgets on them that we never learn what each device does. Depending what you are setting up an expense account for, the items used will differ and may be more complex.
An example would be if you are preparing a budget for a small business. In this blog I will discuss the expenses that you will need to use and understand to work with your finances.
The finances that you need to know and understand are three different expenses:
All 3 expenses are important, but I believe that the fixed expenses are the most important. Why I say this, is because if you do not pay them you may lose the item that you need to pay on a regular basis. Let’s look at some examples of fixed expenses:
1. Rent or mortgage
2. Car payments
3. School loans
4. Utilities - if you have these on level billing. This means that the total, which is an estimate of what you will pay for 12 months, is added together and 1/12 is paid each month. Any of your bills that can be placed on level billing will make handling your finances a little easier.
5. Savings, which is one expense that people do not think enough about. A great deal of your further success in the financial world will depend upon your ability to save money.
Flexible expenses are those expenses that vary in amount from month to month. Some examples of flexible expenses:
3 Charitable donations
4 Utilities not on level billing
The third and last type of expenses is other. This is sort of a catch all that does not fit in the first two: Items such as clothes, presents, comfort things such as magazines, candy, and most things that you buy once or twice a year. We will cover this in more detail when we cover budget and credit report.
Some of the reasons that expenses get out of hand:
2. Putting wants ahead of needs
3. Spending money from an upcoming raise that does not occur
4. Lose of job and not adjusting to the circumstances
5. Trying to keep up with the Jones’ life style.
6. Drugs, alcohol, gambling
7. Too much night life
Next time the discussion will be on DEBT