The ability to control and manage your spending has a huge impact on your financial planning success and life satisfaction.
Here are five ways to check your expenses. Audit each category of your spending to better understand your cash flow, manage it more effectively, and improve your financial planning results.
1. Fixed cost
Fixed costs are regular, consistent costs that can be expected to occur on a regular basis. These typically include things like rent or mortgage payments, utilities, phone, internet, insurance premiums, property taxes, subscription payments, gym memberships, and minimum monthly debt payments.
This is generally a very easy area of spending to calculate because these expenses are predictable and won’t fluctuate much over the course of a year.
time frame for fixed costs
Fixed expenses typically occur every month (mortgage or rent payments, utilities, gym memberships, etc.). However, regular annual, semi-annual, Or less frequent expenses should also be considered.
Fixed cost guideline
If you’re still working, a good rule of thumb is to allocate no more than 50% of your monthly after-tax income to fixed expenses. If you live in an area with a high cost of living (such as New York City or San Francisco), this percentage may be closer to 60%. Your monthly after-tax income is basically the amount of money that goes into your bank account after taxes and deductions are deducted every month while you’re working.
Audit fixed costs
You might think that fixed costs have less control because they are fixed costs. However, monitoring various aspects of fixed costs is essential to maintain financial stability and make informed decisions. Here are some strategies to reduce or adjust these expenses.
- Refinance loan: You can consider refinancing your mortgage or other loans to secure a lower interest rate and reduce your monthly payments.
- Make good tax decisions: Keep taxes in mind when making financial decisions.Roth conversions, deductible expenses, and other factors can reduce the amount you pay the IRS
- Check your insurance policy. Regularly evaluate and purchase insurance policies to ensure you are getting adequate coverage at the lowest price.
- Negotiate the contract: You can negotiate lower rates with your service provider, such as your cable company, internet company, or phone company, or consider a more affordable plan.
- Transportation facilities: Instead of owning a car, consider public transportation, carpooling, and ridesharing to save on fuel, maintenance, and insurance costs.
- Down size: If your living situation allows, consider downsizing to a smaller home or apartment to reduce your mortgage or rent payments and related expenses.
- utility: Pay attention to your water, electricity and gas consumption. Reduce costs by installing energy-efficient appliances and smart thermostats. Unplug your device when not in use.
- Student loan refinancing: If you have outstanding student loans, consider refinancing options to secure a lower interest rate and reduce your monthly payments.
- health care: Check out your health plan options during open enrollment. Consider high-deductible health plans and health savings accounts (HSAs) for potential cost savings.
- Severance pay: Saving for retirement is important, but adjust your contributions as needed, especially if you have high-interest debt or immediate financial concerns.
2. variable costs
Variable expenses are expenses that can vary from month to month and are often discretionary in nature and can be adjusted or controlled based on spending choices. These expenses are typically less predictable than fixed costs and can change depending on your lifestyle, needs, and preferences.
This spending category often leaves people wondering, “Where did my money go?” Variable expenses include things like groceries, eating out, gas, clothing, personal care, social events, and hobbies.
Rules of thumb for variable costs
A useful guideline is to aim to keep your variable expenses within 30% of your net monthly take-home pay. For example, if you have $10,000 coming into your bank account every month while you’re working, you should spend no more than $3,000 each month on variable expenses. Often people use one credit card as a way to track their fluctuating expenses and make sure they are spending within set limits.
Controlling variable expenses
If you’re not careful, variable spending can be difficult to control. After all, it’s different.
Here are some tips:
- Track closely. If you’re trying to manage your budget, you may need to track your fluctuating expenses especially closely.
- Be willing to make trade-offs. If your spending in one moving category is skyrocketing in one month, you may need to cut back on spending in another category.
- Consider an envelope strategy. Use cash or envelopes for certain variable expenses. When the envelope is empty of cash, you will know that you have reached the limit for that category.
Controlling variable spending is an ongoing process that requires discipline and self-awareness. Being intentional about discretionary spending allows you to enjoy what’s most important to you while working toward your long-term financial goals within your means.
3. Infrequent but expected expenses
Even if you think you have carefully planned your monthly expenses, it’s easy to forget about expenses that don’t occur often during the year. These may include extraordinary expenses such as gifts, tuition payments, vacations, charitable donations, and other expenses that occur several times a year rather than monthly.
To avoid cash flow surprises throughout the year, consider adding an “other” category to your spending plan to account for infrequent but expected expenses.
If you know that you typically incur $1,500 in sporadic expenses per year, you can include $125 in fixed expenses as a monthly budget item. This will ensure that you have the funds you need when these expenses arise during the year.
Four. Mandatory and discretionary expenses
Distinguishing between mandatory and discretionary expenses is helpful not only during your employment, but also after you retire. By considering each expense in your spending plan, you can determine whether it is necessary (essential/unavoidable) or necessary (by choice/preference).
Mandatory and discretionary expenses are determined based on personal priorities
The most important part of classifying your spending into discretionary and essential spending is aligning your personal spending with your priorities and long-term goals. By distinguishing between these categories, individuals can ensure that their basic needs are met while consciously directing their resources to what truly matters to them.
This financial management clarity allows individuals to make informed decisions, prepare for emergencies, cut unnecessary expenses, track progress toward goals, and ultimately improve their finances. reduce physical stress and improve overall well-being. Essentially, this classification serves as a practical tool for achieving financial security and pursuing your most cherished aspirations.
These classifications may change over time
This distinction is also highly subjective and can change over time. For example, while you’re at work, you might decide that all your TV subscriptions (Netflix, Hulu, HBO, Apple TV, Showtime, etc.) are nice to have, but not necessary. But a few months into your retirement, you’ll have a lot more time on your hands than you ever imagined, and you’ll want to spend it enjoying all your favorite TV shows. These subscriptions may start to feel even more essential to you.
When faced with tough stock market conditions or job loss, the ability to quickly identify and reduce non-essential and discretionary expenses can greatly ease the journey through these difficult times and help save your finances. physical stress is reduced.
Use rules of thumb for discretionary and essential expenses
There are two general rules of thumb when allocating expenses.
- The 50/30/20 rule suggests that you can keep 50% of your budget for essential spending, about 30% for discretionary spending, and 20% for savings.
- Another rule of thumb is that you should allocate 70% of your budget to essential spending, 20% to savings, and only 10% to discretionary spending.
These rules of thumb are just a starting point and should be adjusted based on your individual priorities and circumstances.
Five. Expenses specific to your personal financial situation
In addition to your personal living expenses, you may also incur expenses due to other special circumstances, for example, expenses related to rental properties you own.
Rental properties often have costs associated with owning or maintaining the property. These costs may include mortgage payments, property taxes, maintenance, utilities, property management, homeowners insurance, repairs, and more. Similar to personal expenses, rental property expenses can be divided into fixed and variable categories.
We also need to distinguish between operating and capital expenses. Operating expenses such as insurance and maintenance are necessary to maintain the property on a daily basis. On the other hand, capital expenditures such as a new roof or kitchen renovation can increase the value of your property or extend its lifespan.
Why auditing your spending has a big impact
If you take the time to regularly review your spending, you may start to see some patterns.
You may already know that there are some areas of your spending that could be improved. That’s why you wince when you look at the “food” category of your expenses. If you haven’t revisited it in a while, you might be surprised by some of the categories. I knew gas was expensive, but it actually costs a lot of money per month.
Whether you review your spending plan quarterly, semi-annually, or annually, assess or audit your patterns and adjust your spending behavior accordingly to align with your values and goals and improve your financial future. It’s important to set yourself up for success.
You may find that making small adjustments to your lifestyle can help you fine-tune both your necessary and discretionary spending, allowing you to reach your financial goals more efficiently.
Be prepared to adjust up or down as needed
Adjusting your spending can help you weather market downturns and other unexpected financial challenges. In some cases, you may find that after years of hard work, saving, and investing, you can increase your spending and expand your lifestyle.
The inflation rate, or the rate at which the prices of goods and services increase, was 7% in 2021 and 6.5% in 2022. If you haven’t evaluated your spending recently, you may be surprised by how much it has increased. .
Help audit and plan your spending with NewRetirement Planner
Gaining a deeper understanding of your spending can seem like a daunting task. However, you don’t have to do it alone.
NewRetirement Planner allows you to model your spending through Basic Budgeter. In addition to reflecting your spending today, you can also model how your spending will change in the future by adding spending from different stages of your life.
PlannerPlus subscribers also have access to Detailed Budgeter with additional features such as:
- Plan for mandatory and discretionary expenses (expenses you must spend and expenses you want to spend)
- Adding tax treatment to specific expenses
- Vary your spending in over 75 categories
This powerful tool helps you plan your current and future spending. So you can be confident that your finances will be supported at every stage of your life.
