Do you know what “sax” means or its origins? A sax was an axe or single-sided sword from ancient Scandinavia. Sometimes, we need to take a sword to our expenses in our financial budgets.
The best way to attack our expenses is to understand the different components of expenses and their function. The different components are fixed, variable, mixed, and discretionary expenses.
A fixed expense is an expense that does not change from month to month. Examples of fixed expenses are a mortgage, rent, auto loan payments, property taxes, home insurance, school loans, and auto insurance. Every month a mortgage or rent payment stays the same. Auto insurance premium may change from year to year, but it typically is the same payment every month for a given year, making it a fixed expense.
A variable expense is a required cost, but the amount can change based on choices or behaviors. Groceries, clothing, credit card payments, fuel for a vehicle, and car maintenance are examples of variable expenses. For example, you need to eat and clothe yourself, but you can control how much you spend on those categories through personal choices. Credit card payments vary based upon use, required minimum monthly payment, and how much a person chooses to pay back each month.
A mixed expense occurs when an expense has a fixed and variable amount. Most utility companies (water, electric, and gas) require a fixed amount to be paid each month for having those utilities available for use. The fixed amount varies from company to company and ranges from $10 to $20 a month, give or take. The variable amount is based on your usage of that utility. For example, if you never turned on the water, you would still have a fixed amount for the water that is available to you. Let’s say it’s $10. If you use five gallons of water in a month, then you pay for those gallons used. If a gallon of water is $1, your monthly bill would be $15…$10 fixed amount plus $5 for five gallons of water. Gas and electric are figured the same way. Trash and sewer are typically fixed amounts.
A discretionary expense is an expense that is not needed to live or survive. Examples of discretionary expenses would be entertainment, dining out, vacation, Starbucks, etc. While a person may love to go to the movies, they do not have to go to the movies to survive or live.
Now that we have an understanding of the components of expenses let’s apply that knowledge to a personal budget. If your expenses are more than what you get each month, then expenses have to be cut.
Discretionary expenses would be the first expense to cut if the money being spent is more than the income being received. Don’t eliminate an entire category when cutting discretionary expenses unless it’s absolutely necessary. It is better to spread the reduction in spending across the discretionary categories.
There are a couple of ways to reduce fixed expenses. Refinancing a mortgage or obtaining an apartment lease that is less are two ways. Making larger payments to the principal on a loan, paying it off earlier can also be done. Make sure there are no penalties for paying off the loan early, though.
Variable expenses can be reduced, too. When we think of lowering variable expenses, we think about decreasing how much we spend on food and clothing. We can reduce our expenses in other ways, too. One example is choosing the location of an apartment based on how utilities will be affected. For instance, heating or cooling may cost more in upper or lower apartments based on the temperature in a geographic location.
My oldest son is moving into an apartment in Florida later this month. He was told by the apartment complex the electric bills for the bottom apartments are less than the top due to the heat during the summer. Heat rises, causing the apartments on the 2nd floor to be hotter than apartments on the main level. The opposite would be true for apartments in the northern states in colder climates. You would want an apartment on the top floor to save on heating costs in the winter since heat rises.
These little tricks to reduce spending can add up to a lot. Finding ways to cut expenses takes strategic planning. If you’re not a big fan of budgeting but love strategy, perhaps applying a strategic plan to your budget will make it more appealing? It’s worth a try!
Would you like to hear our podcast on this topic? If so, check out on Financial Beeswax Podcast page.