Congratulations, you've made it to the fourth and final week of my budget bootcamp. Over the past month, you’ve learned foundational skills to build your own budget, including estimating, verifying, and categorizing your expenses. If you need a refresher on any topic, feel free to revisit the previous articles in the "Blueprint to Budgeting" series.
Before we move forward, let’s explore two key financial terms: fixed and variable spending. Fixed costs remain consistent each month, while variable costs fluctuate. Fixed costs include your mortgage, rent payments, and insurance premiums. Variable costs cover things like dining out and entertainment. Take a moment to analyze your budget and distinguish between your fixed and variable costs, just as you did with discretionary and non-discretionary expenses. A good practice is to categorize all necessary living expenses as fixed. Even though your grocery bill may vary from month to month, groceries are a necessity. In contrast, dining out is not essential for survival.
The key takeaway is that your budget should reflect how much of your monthly expenses are within your control and how much are not. If you plan to take on more debt, incorporate this fixed expense (like a debt payment) into your fixed vs. variable expense ratio. If things go awry, ensure your budget has enough flexibility to reduce variable spending, allowing you to continue making debt payments on time and avoid additional fees or interest. While there isn’t a precise formula, the 60/40 and 50/30/20 rules discussed last week are excellent starting points.
My Two Cents: This week, focus on projecting your expenses for the next month, quarter, and the rest of the year. Barring no major changes to your life situation, such as moving, fixed costs are straightforward. Simply carry over the amount you’ve been spending into the next calendar month’s budget and beyond. For variable expenses, the most effective method is to average your spending over the last six months. We naturally spend more in some months and less in others, so averaging provides a realistic picture of your spending. After calculating the average for each variable expense category, add a 5-10% buffer—what I like to call margin. This margin gives you a bit more breathing room if needed. For example, if you’ve spent an average of $150 per month dining out over the last six months, adding 10% ($15) brings your new budget to $165. This margin accounts for any slip-ups without derailing your budget. If you stay under the $150 average, even better—that’s more money in your pocket at the end of the month.
Now let’s talk about those unexpected, one-off expenses, like needing new tires for your car. First, get an accurate quote. For simplicity, let’s say new tires cost $1,000. Determine when you’ll need them—if it’s December and it’s currently August, you have four months to save. Divide $1,000 by four, and you’ll need to save $250 each month. By December, you’ll be ready to cover the cost without financial stress. Whether it’s planned trips, doctor visits, car maintenance, or holiday gifts, get an estimate and divide the total to find out how much you need to save monthly. I also recommend setting up a high-yield savings account at a separate bank for these specific savings. Automatically transfer the necessary amount from your checking account each month. This separation helps you avoid impulsively spending the money.
Some final tips - As you calculate your fixed and variable expenses and set goals for the upcoming month, start small. Instead of cutting your spending drastically, focus on reducing 1-2 areas by 5-10%. Making smaller adjustments is more sustainable and less shocking in the long term. Lastly, pay close attention to your projected take-home pay (net income) minus your projected monthly expenses. Adjust your margins or spending goals to ensure you’re not spending more than you’re bringing in. If you find yourself overspending, this entire process will be in vain. Stay diligent, and you’ll see the rewards of your budgeting efforts!
If you have any questions or comments, please do not hesitate to reach out to me. I read every email, and I always love hearing about the areas you find helpful or learning about ways I can improve. My goal is to always help people and make financial education accessible.
Alternatively, if you're feeling stuck and would like to book a 1:1 session with me, please send me an email at jslimitedgroup@outlook.com or call/text me at (970) 903-3709. The first session is always free, so what do you have to lose?
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