Reduce Debt Increase Wealth

Type of Expenses

June 13, 2021 MisterChuck Season 2 Episode 65
Reduce Debt Increase Wealth
Type of Expenses
Show Notes Transcript

What are types of expense that should be in a budget? Mister Chuck explain the types and the categories in making a simple budget

.Article Links:

https://fiscalfitnessphx.com/know-your-expenses-know-your-budget-four-types-of-expenses-and-how-to-plan-for-and-cut-them

 https://www.quicken.com/blog/budget-categories By CRAIG TSUCHIYA

5 Signs You're Doing Better Than You Think When it Comes to Your Money (fiscalfitnessphx.com)

Charles McDonald:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant, turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom takes commitment, confidence determination. The last episode, I talked about helping my friend get out of his credit card debt. A nd towards the end of it as his credit card debt was being paid down, I urge him to stay on track in the pay off all his debt. That way, every time you buy something, you have to manually enter it either into your checking account, or one of your credit cards. You keep track of what you're spending, you know what you're spending when you're spending it. And that's the first thing you need to do. If you're not doing that you need to get that done. I recommend count about is a online so you can log in anywhere, c heck register. Plus, you can track multiple credit cards, multiple savings accounts. It's everything you spend an owe at a glance. If you're interested, support my show, go to reduce debt increase wealth.com click on the heart. And that will take you to the 15 day free trial. Go ahead and use that you don't need a credit card or anything. You can use it you can use it with you can download your all your details in don't do more than 30 days, I did a review on that. So I don't don't put in more than 30 days, and you can get it all set up. And you can see how it works. You can manually enter and then disconnect from all your banks and credit cards. Once you got that initial download done, and you then need to manually keep everything up to date. So when you spend something you need to enter it, if you charge something on a credit card, you need to enter it. That's the first thing you got to do. Now this episode, I'm going to talk about types of expenses. There's five type I believe there's five if I remember right, maybe four types of expenses that you need to understand for your budget. And then I'm going to talk about categories you need to have in your budget. The basic stuff, we're going to keep this fairly simple. Okay, we get this from know your expenses, know your budget for types of expenses, how to plan for and cut them. He can find a link to this article in my show notes. I guess there's four expenses I was wrong about five. The first one is what is a fixed expense. First 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 and for a certain amount. your mortgage, cell phone, car payment, gym membership, utilities, and net FX are all fixed expenses. Think of fixed expenses like your bills, weekly expenses such as daycare payments, dog walking service or House Cleaners, well not on a monthly budget, our fixed expenses to they occur on a regular date and for a standard amount. Even that withdraw happens multiple times during a month. The next type of expense is reoccurring. We sometimes refer to reoccurring expenses as day to day expenses. They are the types of expenses or purchase that happens throughout the month. They're not as predictable effects expense in terms of their date or amounts. Some reoccurring expense you probably have or groceries, gasoline eating out, then there's non reoccurring expenses, non reoccurring expenses, so ones that trip people up all the time when they decide to get on a budget, these expenses only happen once or a couple times a year. But when they hit they might be big, so not forgetting to account for them can be a costly mistake. And for me, they would be something you pay on a quarterly basis, for example of water bill, water and sewer bill, a semi annual bill such as real estate taxes, and insurance, homeowners insurance, I pay annually, car insurance, I pay twice a year, semi annual. So these are things that while the you're not paying them every month, they're gone to come up on a semi regular basis, non reoccurring. So insurance, real estate taxes, water bill, trash bill, stuff like that. And then there are emergency expenses. And the article is referring to this as a Whammy expense. They're the most frustrating kind of expenses, for the most part, they are unpredictable, you don't know when they're gonna hit or what they're gonna cost you, but you will most definitely feel it when they do. Your car gets totaled, your roof starts leaking, your car breaks down. You owe more in income taxes than what you plan for things like that. If you're a believer in Murphy's Law, then no, it's not a matter of if, but when, and sooner or later, they will get you how the budget for the different types of expenses, why you can cut how to cut your fixed expenses, fixed expenses, sometimes the easiest to eliminate from the budget, I can't tell you how many times he asked a client to review their monthly expenses, they got surprised. We see a lot of clients who sign up for a free month of some online service forgot to cancel it. So now they're getting billed for that monthly expense. So if you sign up for anything, and you give them a credit card, and you forgot to cancel it after the 14 day free trial, or the 30 day or whatever was and you're still paying for it, are you using that service, if you're not using it, you need to cancel it. So it's just a matter of identifying where your money's going, knowing how much you are spending. And then try to reduce it a little by little by little at a time. So that's how you cut and trim, identify things that you're no longer using and then cancel it right away. And you'll be surprised you might come up with an extra 15 $100 more a month. And if you're struggling to pay off credit card bills, that's gonna help you so you can read that article and go from there. It's pretty basic. So there you got four types expense, fixed expense, things you pay on a regular basis every month, non reoccurring, or reoccurring expenses, things like groceries, gasoline, things that you pay as you live your life throughout the month, non reoccurring expenses, things you pay quarterly, semi annual or annually, subscriptions would be a good one. For me, it's real estate taxes, a semi annual house insurance, his annual car insurance is semi annual water and sewer is quarterly and trash is quarterly. You got to budget for all the things or you forget about it and you won't have the money. So that's important. The next thing we're going to start talking about is getting your budget started. What are the categories you should be using? So when I got started with my friend to help him get his credit card debt under control. I asked him if he had a budget. He said What's that? I said, Well, we need to set a budget. What do you use to track your expenses? What do you use to track your spending and your income? And that's when he told me nothing. That's why I started this episode. saying you need to have your own check register, whether you do it manually, or you do it through some app, or use some online account, like I referred to account about. So I got him to do that first, then we worked on setting up a budget, we couldn't really start the budget until we knew what he was spending at least the last 30 days. So I could see what his regular spending items are, or his regular expenses, like the mortgage, car payments, credit card payments, utilities, stuff like that. So we now we're gonna start talking about if you're setting up a budget, you need to have categories, because we have fixed expense, we have reoccurring expenses, we have non reoccurring expenses. And we have emergency expenses, or the Whammy expenses as the article referred to. So in the budget, those type of expenses by category. So what's a category categories are a grouping of the expenses, they can be all the expenses are just some of them, whether it's fixed, reoccurring, non reoccurring, or Whammy, or emergency are grouped together. For this same general class, I have an article in my show notes, that's 10 budget categories that belong in your plan, I'm not going to cover all 10 on this is going to cover the ones that are most important. It's quick and calm blog budget categories, if you want to read it. And we're going to start with the essentials. Now, these are categories that, as I said before, can include all the different types of expenses. The number one essential is housing. So in this category, if you have a mortgage, where your real estate taxes and your insurance is included in your monthly payment, you just include your mortgage payment. And then also you don't have to worry about the taxes or insurance because it's already part of your mortgage payment. If you're renting, it would be the amount of your rent, plus any housing association dues, or any maintenance costs that you may have. Now, that could just be an arbitrary number of $50 a month, $100 a month. And then as you go through a few months, you can adjust that number up or down considering what it is. Obviously, if you're in a new home, it could be zero. If you're an All home older home and you're rehabbing it, do not include the rehab costs, because it has not really maintenance, you're really fixing it up unless you want to do it little by little over time. And then you could include that but you don't need to include your property taxes, or your insurance. If it's all part of your escrow monthly payment. If it's not part of your monthly payment, then your property taxes are included in the housing category and your insurance would be included Later, we'll cover that in a minute. This category should not exceed 35% of your take home pay. If it exceeds 43% is you're on a hard a hard time getting refinancing or a new mortgage of any type. The second category is transportation should not exceed 15% of your take home pay 10% would be good. So everybody regardless of location, lifestyle, everybody needs to get from point A to point B This is why a transportation is considered an essential cost typically includes car payments, registration, DMV V's gas maintenance, parking, tolls and public transportation. Also, Uber Lyft or taxi cabs would also be included if you do that on any regular basis or an emergency basis if you do it so far. We got to housing transportation, number three is food 10 to 15%. This would be your groceries are essential for every family and these would be reoccurring expenses that you go into the grocery store. However, sometimes you can include your dining out if you only do it once a week or once a month. You could include your restaurant meals, work lunches or food delivery under this category. However, if you're someone who tends to spend a significant amount of money on things like gourmet foods and wine, you may want to put your non grocery food expense and two on one of the nine essential categories later on or a miscellaneous category, so the food just needs to be food. If you go out the restaurants every day, you need to stop that if you have a debt problem if you're trying to pay off credit cards, number four is utilities is not included under a housing it's got his own category should be five to 10%. That's water, electricity, heating and cooling Are you know a vital to maintaining your home also would be water and sewer and trash bills would be included under utilities. You can also include cell phone, cable and internet expenses do not include cable TV or streaming, these are basic utilities that you pay every month may not be the same amount every month, but you pay every month around the same time. So they're pretty much a fixed expense, then we have insurance and this is optional on how you want to handle it. You can have a category that you call insurance, where you put in all your insurance. If you have an escrow on your mortgage do not include your homeowners insurance, but insurance would be auto insurance, health care insurance, if the health care is already out of your pay, you don't need to include it. This is healthcare insurance, you're paying in addition to what's being deducted from your pay, if you have warranty insurance, renter's insurance or protection plans, all that's included and disability insurance, life insurance, all that's included under the category insurance 10 to 25% or less, you can always do less, you don't have to spend these percentages, these are guidelines, these percentages is what you should not exceed medical and health care I'm not going to talk about you can or cannot include it depending on the size of your family. If you have a lot of children, then you may want to include it if you're always going into the doctor. But the next most central one is saving investing and debt payments 10 to 20%. It's often an overlooked category or underfunded arguably the most important of those saving money doesn't have much of an impact on your day to day existence. It has everything to do with you and your family's financial health further down the road. And the world of budgeting is called paying yourself first and we talked about that in past episodes. This includes your emergency fund, and your retirement fund. Now if you already have read fire retirement fund through work, and has already taken out your pay, you do not have to include it in this category. But if you don't have it through work your fund in your IRA or retirement account on your own, then you need to have this category. It also includes what you're paying against your debt. So that would be all your credit card bills, your minimum monthly bill how much you pay each credit card, the minimum amount is all you should be paying. Remember, the first thing I do my debt reduction plan is quit creating new debt. Second thing is pay the minimum amount on all your credit card bills. The third thing is take any discretionary income you may have left, put it in your savings, build up your emergency fund. And once you have a minimum emergency fund of $1,000 anything you get an excess of that apply to a credit card, that's why it's important, you know and keep track, keep track of your spending. There's one more category that I would recommend and I call it miscellaneous and that's the this the keep thing simple is the category that you use for anything that you spend could be personal spending for clothes, lifestyle stuff, gym membership, grooming products, shoes and clothing, gifts, personal hygiene, dry cleaning, household items, laundry detergent cleaning supplies, I also would just make a big category and also include entertainment. If you're struggling with credit card debt, entertainment and recreation he need to do occasionally but it should be a smaller amount of your budget. So miscellaneous for anything you're not already budgeted and make it a reasonable amount. I make mine like $300 a month you may make it a $500 a month. Remember if you don't spend it, you still have the money. So if you make it $500 a month and you only apply $200 worth of expenses to it for consistently for two or three months. Then you can consider reducing it down to $300. That doesn't mean you have that money there to spend, it just means that that's how you're tracking it. And the less that you spend, the more you can save, the faster you get your credit cards under control. Now, each one of these categories, whether it's housing, transportation, food, utilities, insurance, and savings, investing, and debt payments, all have fixed expense within them, reoccurring expenses, real and non recurring expenses within them, and maybe a whammo or a emergency expense that pops up in there. So one of the examples under housing would be your hot water heater goes out, that would be a whammo expense, or emergency expense. That's why you need to have an emergency fund, it might cost you 800 $900, to get a hot water replaced. And if you have the money, and an emergency fund, you can use that money to pay this item, and you achieve the purpose of not creating new debt, then you got to build that back up until you have it in there again. So the best scenario would be you have 20 $500 in your savings account, your hot water heater goes out cost you $950. To get it fixed, you still have over $1,000, and you just have a little bit less money to apply towards a credit card bill, maybe a couple weeks down the road. Because once you pay that credit card, that money's gone, you can't use it. That's why I recommend building up your savings account and leave it in a savings account in case you have that an emergency. And then you have the money. And then you can see if still make the minimum payments on all those credit cards, which is very important that some of the non essential expenses or personal spending, which is a catch all, which we already kind of covered recreation and entertainment, it's fun money, things you do maybe going out on Friday after work or going to a concert or a sporting event, or night out bowling vacations, streaming service subscriptions, kids activities and restaurants that you did not include under the food expense above. putting it all together. Now you have an idea how to allocate your income based on steder budgeting categories, you're ready to start building your budget plan. Just remember, flexibility and customization are keys to success. Everybody is different. Everybody's spending is different. But the most important thing is keeping track of everything constantly, in real time. So you know how much money that you have in a checking account at all times. So you don't spend more money than what you have on hand to pay for credit cards need to be treated like cash. If you don't have the cash to pay for that item. don't charge it. If you do use a credit card for convenience because you're buying something online, he should have the money to pay that off in full. The next time you're paid or before that credit card becomes due, you can always make your payment on your credit cards weekly if you want to. If you want to keep the balance down or lower, especially when you buy a big ticket item. big ticket item means something expensive, and you can pay for it and cash. Wait till Friday. Buy it wait till it's on your credit card, two, three days, maybe a week, pay it off, pay that dollar amount off. I don't like creating new debt and you shouldn't either. All credit cards should be treated like cash. I'll be back in one moment with my final thoughts and a bonus item for everybody. If you listen to this podcast using an apple podcast app, please rate and review this podcast. If you don't know how to rate and review within the apple podcast app, do a search even if you're already at reduced debt increase wealth, you do a search once the search is done, you click on reduce that increased wealth. He then scroll down through the episodes and towards the bottom. You'll see write a review. You can rate the stars. If you click on write a review. You can write your comments and then click on the number of stars you wish to select. When you set up your budget, it should be with the actual numbers that you're spending. You don't use arbitrary numbers that are made up because that would be meaningless And what good is that gonna do you? a budget is intended to put everything in front of you in black and white. So you can make informed decisions on items, you may need to cancel that you're no longer using, or items that you can help reduce by calling the provider and see maybe there's a better plan. member, it's only a guide. So use it as such with the actual numbers. For items such as gasoline groceries, you can use a average amount that you spend in the last 30 days. And you need to review that every 30 days to see how close you are. If you're close, leave it the same. If you're way off, adjusted up or down, and you'll get a good feel for what you're really spending on those items. Remember, it's a guide, not an end all to all. It's not meant to put you in jail. The debt help you identify where your spending is going. And now next we're going to talk about my bonus, five signs that you're doing better than what you think you are. This is from physical fitness. thx.com got a link in my show notes. And what are the five signs we're trying to be positive here at the end. The first one is you don't overdraw your checking account is the first step to financial freedom. You have to stop the bleed from your bank account. That means understanding your income and expenses. That's why we talked about setting up a budget. The date you get paid the amount you get paid and each bills get paid, so you don't overdraw your checking account. Know what you got and what you owe. Number two, your debt payments or credit card balances are trending down. paying down debt is a good sign that you control your money and that your bills are paid on time. Number three, you don't lay awake at night worrying about money. You rest easy knowing all your bills are paid and debt is decreasing that family that you admire, who has it all might not be able to say the same number for you rarely experienced buyer's remorse. every purchase is a calculated decision. You ask yourself is this purchase in my budget? Is this a want or a need? Most buyer's remorse come from quick decision to make without thinking about the financial consequences. So if you're pausing before you make those kinds of purchases you're doing Okay, number five, you're saving for your future expenses and retirements. Once the bills or pay the emergency account funding, the debt paid down. It's time to start saving for future expenses like car repair, travel and retirement. This is when you start to see real gains and maybe even feel like you're might just know a thing or two about this money stuff. After all, all the signs point to one thing. You have a plan