Simply put, Expenses are the goods or services you spend your money on. This is the category of spending that is typically addressed by “budgeting”. Generally I find budgeting posts to be overwhelmingly unglamorous or wrought with not-so-subtle value judgements – both of which can be really frustrating. That is not my intention. Instead, I want to offer you a perspective in which to analyze your own spending habits and to develop a way to frame spending decisions. So here goes!
I organize my expenses across two main categories Discretionary /Non-Discretionary and Fixed / Variable. Thus resulting in four possible combinations:
- Non-Discretionary Fixed
- Non-Discretionary Variable
- Discretionary Fixed
- Discretionary Variable
I think of Non-Discretionary Expenses as those that are required to “Live Reasonably” and wouldn’t cause an adverse reaction to non-payment. What it means to “Live Reasonably” differs from person to person, so it’s really up to you to decide. I’ll offer you my thinking.
For me, some examples of Non-Discretionary Expenses are rent, electricity, cell phone service, food and student loan payments. These are items in which I’ve either signed a contract to pay regularly and would be penalized for non-payment or are what I require in order to “Live Reasonably”.
These expenses can either be fixed or variable. I think of fixed costs as costs that are the exact same month-over-month, at this point in time. That second part is important, because there is an argument that all expenses are variable over a long enough time horizon. For instance, you could find an apartment for less or more money or you could refinance your student loan for a lower monthly payment. However I have found it useful to limit this exercise to “point-in-time”. Thus thinking about your expenses as things that won’t change without some concerted effort and that wouldn’t likely change month-over-month. The utility of this will be apparent shortly. In any case, Non-Discretionary Fixed Expenses would be things like rent or student loan payments, which are the same each month. Whereas Non-Discretionary Variable Expenses would be items like food. I classify food as a variable expense because the total amount spent on groceries changes month-over-month to some degree.
Discretionary Expenses are items that are not required to “Live Reasonably” or would not result in an adverse reaction to non-payment. Examples in this category would be clothing, eating out at restaurants, Netflix subscriptions, etc. Now some of you may recoil at categorizing the aforementioned expenses as discretionary – I kind of am as I am writing this. Please don’t think that because I categorize something as discretionary that it means it isn’t essential. That is not what I am suggesting.
Discretionary Expenses can also be classified as Variable or Fixed. Discretionary Fixed Expenses would be items like a Netflix or Audible subscription, or monthly Charitable Giving, where the monthly payment remains the same month-over-month. Alternatively, Discretionary Variable Expenses would be items in which your spending changes each month, examples of this are spending on gas, taxis, gifts and clothing.
Next, I would encourage you all to write out your monthly expenses and apply these categories to them. One other note, if applicable, you should indicate any expenses that are Reimbursable. For instance, I am reimbursed for my mileage when I use my personal vehicle to drive to my office, therefore my tolls and even my monthly car payment are essentially reimbursable.
Now that we’ve classified all of your expenses, I can offer you some insight into how I think about each of these items in the next post.
Photo by Wembie Zhokwo on Unsplash