Your Spending Choices in Your Budget
(4 of 7)
Your Spending Choices in Your Budget
Most people are not independently wealthy and have to work and make money to support their lifestyle and save for their financial goals. While it is up to you how you spend and save your hard-earned income, it is important to understand the tradeoffs between spending and saving. By spending most or all of your income, you set yourself up for not being able to save for your future financial goals like buying a car or a home and saving for retirement. Spending is about making choices. It’s important to understand the different types of expenses and the impact your choices have on your financial situation today and into the future.
Things To Know
- The most basic definition of a need is that it is something you need in order to survive.
- A want is something you really wish you had, but you can still go through your day-to-day activities without.
Fixed and variable expenses
Expenses may be fixed or variable. A fixed expense is a recurring expense of approximately the same amount each period (month). These types of expenses are easy to budget for because they need to be paid each month. Examples include:
- Mortgage or rent payments
- Automobile payments
- Insurance premiums
- Utility bills
- Cell phone, cable, Internet bills
An expense is variable when you have control over when and how much you spend. Variable expenses generally do not recur each period or their amounts are very different from month to month. Variable expenses include:
- Entertainment
- Dining out
- Groceries
- Vacation costs
- Purchases of clothing and household items
These expenses are variable because you have a choice regarding:
- IF you want to incur the expense, and/or
- HOW MUCH you want to spend on the expense.
Expenses: needs vs. wants
Bank your future. For some perspective on needs and wants and the differences between the two, check out this video:
Regardless of whether your expense is fixed or variable, it can be categorized as either a need or a want.
The most basic definition of a need is that it is something you need in order to survive. Examples of the most basic needs are food, shelter, and clothing. Most of us have many other needs in our lives also. Examples might be:
- Transportation
- Books for college
- Computer
- Furniture
- Sporting equipment
- Cell phone
However, what type of item you choose to spend money on in any of these categories makes a big difference in your budget. You probably can get by just fine with a decent used car rather than a new sports car or truck. You probably even have a choice to buy lower-cost used books rather than new for college.
A want is something you really wish you had, but you can still go through your day-to-day activities without. For example, if you are furnishing your apartment or home you may want to purchase a high-end leather sectional couch and the newest 60-inch ultra-HD TV. In reality, you likely only need a comfortable new or used couch that cost a fraction of the leather sectional you want and you can probably get by with your current TV or a less-expensive choice. Making these choices will help you save more for other short- and long-term needs.
Spending money on wants is okay as long as you can afford them and understand the tradeoff of spending more than you need. Ask yourself if you could use the money for a more important need or goal that you have in your life. Strike a balance between needs and wants by setting spending and saving priorities.
Tracking expenses
A great way to learn about how you spend money is to track your expenses. For the next 30 days, write down your daily spending. Include everything from a snack you purchase at a convenience store to a car payment. This can be an eye-opening experience as you can evaluate what you spend money on. What expenses are fixed or variable, or needs or wants? Do you want to change how you spend in order to save more?
