A big step towards getting a handle on your budget is knowing your expenses. You may think expenses are, well, “just” expenses. “If the money’s going out, it’s an expense.”
But here at Fiscal Fitness, we like to think of your expenses in three distinct categories. We call these categories Money Macros™.
Now, if you’re a gym-obsessed person like us, you’ve probably seen someone somewhere talk bout their “macros” when it comes to food and tracking their intake of the types of foods they are eating. And if you’re not, that’s okay because I’m going to break down what Money Macros™ are (and why you need them) right now:
The Three Different Money Macros™ Are Bills, Day-to-Day Spending, and “Whammies”
Let’s dive in.
What Are Bills?
In the “bills” expense category, we include fixed expenses and non-recurring expenses (bills that you only have to pay once in a while). Let’s break this down a bit more:
Fixed expenses are the kind of expenses most people consider when drafting a budget. They are standard expenses that happen every month, on a certain day, and 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.
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 they might hit big when they hit, 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 also include 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, Midwest 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 are Day-to-Day Expenses?
We sometimes refer to your day-to-day expenses as recurring expenses.
These are the types of expenses or purchases that happen throughout the month. They are not as predictable as fixed expenses regarding 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 Whammy?
Whammies are the most frustrating expense when trying to maintain a budget because they 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 believe in Murphy’s law, then you know it’s not a matter of if but when the whammies get you.
How to Budget Using Your Money Macros™
Knowing the types of expenses and 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 your expenses.
Managing Your Bills
This is probably the easiest place to start trimming, especially when discussing your fixed expenses. I can’t tell you how many times we’ve asked clients to review their monthly expenses. They are often surprised at the things they’re paying for – in fact, we have a lot of clients who have signed up for a “free” month of service, forget to cancel it before the actual cost debits their account, and now they’re getting billed for that as a monthly expense.
Sometimes the amounts of your recurring expenses change, and you may not even notice. Streaming services or your internet provider’s pricing can increase 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 one of your recurring bills 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 of reviewing all of your fixed expenses might be that you start seeing some overlap. If you’ve got subscriptions to Netflix, Hulu, Sling, and MAX, cutting just one of those services might make sense if you’re looking to trim your fixed 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 those pants that you’re 100% sure you put in the rag bag because they’re more hole than pants…
Well, you can tell them that last one, but you’re still going to need to buy them new jeans anyway. 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.
For example, if your water bill arrives twice a year and is around $500 each time, then your goal would be to open a savings account that puts a little toward that bill every month.
The easiest way to do this is by figuring out how much you need (or your best guess of how much you’ll need), then dividing that total by 12, and setting up an auto-transfer every month. Instead of coming up with $500 to cover that bill twice a year, you’re putting around $80 monthly in a savings account, which is far more manageable.
Day-to-day expenses are less certain, making them a little harder to cut. But they’re 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 you thought it was closer to $800.
Most people have a harder time reigning in these expenses. This is why 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 monthly budgeted amount 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.
Well, I’ve got a bit of bad news for you: whammies are called whammies for good reason. Because they’re never planned. That’s just the nature of whammies. They are difficult to predict.
But you can soften the blow of a whammy by setting up an emergency savings account that is completely separate from the multiple accounts you’ve set up for your non-recurring expenses.
An emergency savings account should only be used for a real emergency (like when your garage door falls off the rails or your teen backs into your neighbor’s brand-new truck). Having that emergency savings 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 (which is actually a non-recurring expense that falls under the Bills Money Macro™), even though yours already had 50,000 miles on them.
Knowing The Different Types of Expenses To Budget For
We often say that with budgets, what we’re doing is planning for 80% of your expenses. We can’t plan for all 100%. That’s impossible because life doesn’t work that way. But if you’ve planned for 80%, the remaining 20% becomes far more manageable.
And that is why budgeting is so important if you want to become better with your money.