A big step towards getting a handle on your budget is knowing your expenses. You might think expenses are expenses. If the money’s going out, it’s an expense. But here at Fiscal Fitness, we like to think of your expenses in four distinct ways: fixed, recurring, non-recurring, and whammies (the worst kind of expense, by far).
What are these different types of expenses and why do they matter? We’re glad you asked.
Let’s dive in.
What is a Fixed Expense?
Fixed expenses are the kind of expenses most people think of when they’re drafting a budget. They are standard expenses that happen every month, on a certain day for a certain amount. Your mortgage, cell phone bill, car payment, gym membership, utilities, and Netflix are all fixed expenses. Think of fixed expenses like your bills.
Weekly expenses like a daycare payment, dog walking services, or house cleaners, while not a monthly bill, are fixed expenses too. They occur on a regular date and for a standard amount, even if that withdrawal happens multiple times during a month.
What is a Recurring Expense?
We sometimes refer to recurring expenses as day-to-day expenses. They are the types of expenses or purchases that happen throughout the month. They are not as predictable in terms of their dates or amounts, but they reliably happen. Some recurring expenses you probably have are groceries, gasoline, eating out, and Target runs (who can resist a Target run?).
What is a Non-Recurring Expense?
Non-recurring expenses are the ones that trip people up all the time when they decide to get on a budget. These expenses may only happen once or a couple of times a year. But when they hit, they might hit big, so forgetting to account for them can be a costly mistake. Common examples of non-recurring expenses include a water bill, car registration fees, or your Amazon Prime membership.
But non-recurring expenses aren’t just bills. They’re annual or semi-annual purchases you make and need to make, like for example, clothes, shoes, and other apparel. If you live in a state where seasons change (hi Michigan friends!), chances are you’re making at least a few strategic wardrobe updates a year. Or for our clients in warmer climates, budgeting for semi-annual pool maintenance might be a non-recurring expense.
What is a Whammy Expense?
Whammies are the most frustrating kind of expenses. These are for the most part unpredictable. You don’t know when they hit or what they’ll cost you, but you will most definitely feel it when they do. Think of some worst-case scenarios: Your car gets totaled. Your roof starts leaking and you find out you need to reshingle the whole thing. The federal taxes you owe are thousands more than you thought they’d be. These are emergency type expenses. If you’re a believer in Murphy’s law, then you know it’s not a matter of if, but when. The whammies will get you at some point.
How to Budget for Different Types of Expenses
Knowing what these expenses are and knowing how they affect your budget are two different things. When you’re dialing in your budget, you have to approach each of these expenses differently, especially if you’re looking to trim some.
How to Cut Your Fixed Expenses
Fixed expenses are sometimes the easiest to eliminate from your budget. I can’t tell you how many times when we’ve asked a client to review their monthly expenses, that they get surprised. We see a lot of clients who have signed up for a “free” month of some online service and forgot to cancel it, so now they’re getting billed for that monthly expense.
Also, sometimes these monthly amounts change, and you may not even notice. Cable bills or internet service prices can raise without notice, and unless you’re on top of your fixed expenses, you might not notice or remember when that introductory rate goes away. If a price goes up, that may incentivize you to shop around or call to ask for a cheaper rate. But you’re only going to know to do that if you have a good handle on your fixed expenses.
Another side effect reviewing all of your fixed expenses might be that you start seeing some overlap. If you’ve got subscriptions to Netflix, Hulu, Sling, and HBO Now, cutting one of those services might make sense if you’re looking to trim your fixed expenses.
How to Cut or Trim Your Recurring Expenses
Recurring expenses are less certain so they feel a little harder to cut. But they also are the expenses that we tend to have less of a handle on. If you start to track what you’re spending at the grocery store in an online tool like Personal Capital or Mint, you might be surprised to see your average grocery bill is around $1,000 per month, when maybe you thought it was closer to $800.
Most people have a harder time reigning in these expenses. We advise our clients to take this approach – use cash. When you use cash for your recurring expenses, you physically feel the dollars leaving your pocket, so parting with them becomes harder. Plus, you’ll know when you’re close to hitting your budgeted amount for the month because you’ll see it. There’s no reconciling your expenses with online software. You simply open your wallet and start counting the dollar bills.
It takes some practice to get the hang of using cash. Check out these blog posts for some of our best tips for how to use cash.
How to Trim and Plan for Non-Recurring Expenses
Non-recurring expenses can be harder to trim. After all, it’s not like you can negotiate down the price of your Costco membership, stop paying your water bill or tell your kids to stop wearing holes in their pants. Well, you can tell them that last one, but you’re still going to need to buy them new jeans anyway. So with non-recurring expenses, it’s more about planning to make sure these expenses don’t feel like whammies when they hit.
Planning for non-recurring expenses is done most effectively with multiple savings accounts. Having a savings account for each type of non-recurring expense means when that expense hits, your pulling from a savings account, not your monthly income. Let’s say your water bill hits twice a year and is around $500 each time. Your goal is to open a savings account that puts a little toward that bill every month. The easiest way is figuring out how much you need – or your best guess of how much you’ll need – diving that total by 12 and set up an auto-transfer every month. So instead of coming up with $500 to cover that bill twice a year, you’re putting around $80 per month in a savings account.
Several online banks let you set up multiple savings accounts. Check out this blog post for a few of our recommendations and best practices for creating and funding these accounts.
How to Plan for the Whammies
Bad news: You can’t. Well, not fully. That’s the nature of whammies. They are difficult to predict. However, the easiest way to soften the blow of a whammy is with an emergency savings account. This emergency savings account is a separate fund from the multiple accounts you’ve set up for your non-recurring expenses.
An emergency savings account should be used for just that: a true emergency. It provides a cushion when you’ve suffered a severe blow to your finances. It’s not meant to cover the gaps because you forgot to budget for new tires (a non-recurring expense) even though yours already had 50,000 miles on them.
When should you use your emergency fund and how much should you save? Our advice is different than the standard “3-6 months of expenses” response. Check out what we recommend here.
But that goes back to the reason why having a budget is so important. We often say that with budgets what we’re doing is planning for 80% of your expenses. We can’t plan for all 20%. It’s impossible. Life doesn’t work that way. But if you’ve planned for 80%, the remaining 20% becomes far more manageable.
Want to get a better handle on your expenses and get a plan for your money while you’re at it? Check out our Eureka sessions. Leave this two-hour, one-on-one coaching session with a plan for all your expenses and will transform the way you think about your finances. Learn more about our Eureka sessions for professionals, couples, and small business owners here.