There are three different types of expenses:
- Fixed – expenses that don’t change from month to month. This also includes those required for survival, such as shelter, emergency funds, health care, transportation expenses, and any child or dependent care.
- Flexible – expenses that vary each month but are also essential for survival, such as food, personal necessities, transportation repair and maintenance, and utilities.
- Discretionary – expenses that don’t vary each month but generally are non-essential or cost more than necessary. Vacation, gifts, eating out and self-treatments fall under this type of expense.
Discretionary is the most loosely defined category and will require the most modification based on your own current financial situation; the way you manage it may change over time, but you must be willing to modify it if you want to be financially stable. Although discretionary expenses are the easiest to adjust, others may also be modified depending on your limitations. For example, you can modify your fixed housing expenses by choosing to live with roommates, taking the bus or train instead of driving your car, or choosing a less expensive cell phone plan.
Needs Versus Wants
Budgeting will help you distinguish your needs and wants, as well as manage the significance and priority of your purchases.
- Begin with a list of things you’d like to save up for.
- Identify each item as something you absolutely need or something that’s really a want. Be honest with yourself!
- If you define something as a want, ask yourself if you would still be happy a month from now if you go through with buying it.
- Prioritize each item on the list.
- Now you can determine whether you should incorporate each item into your budget.