Budgeting 101 – Part II

So now that we have a handle on how much we make every month, let’s discuss expenses. There are two kinds of expenses: committed and discressionary. Your committed costs are those expenses that you pay month after month, with little variation. Committed costs include (but are not limited to) housing, debt, utilities and insurance. Discretionary costs are those you have more leeway with. Those costs include (but are not limited to) groceries, gasoline, entertainment and gifts. More people consider savings a discretionary cost, but I consider them a committed cost. Savings should be a necessary part of your budget, even if it’s only a few dollars per paycheck. We’ll discuss savings in a future post.

Remember all those bank statements I had you dig out in the last post? You still have them, right? Good, because they are still wicked helpful to this process. Let’s dig through the statements and find your committed costs. Get out some paper. This is a hands on blog after all. Make a list of your committed costs. Here are some examples, for instructional purposes only:

  • Mortgage or rent – list your total mortgage payment, including escrow payments for interest and taxes, or monthly rent. If you own a condo, don’t forget to list your condo fees.
  • Student loans
  • Car loans
  • credit cards and other debt – If you pay your credit cards off each month, include the average credit card bill for the last six months. If you are paying monthly payments, I want you to list your minimum payment for each card. You may pay more on your credit cards each month, but right now, we are just trying to get a bare bones budget. We can allocate more to credit cards once we know how much discretionary income we have.
  • Utilities – Electricity, gas, heating oil, cable, telephone, cellphone and internet. I also include my Netflix subscription here. I have decided that I can’t live without my Netflix subscription and since it is a fixed monthly expense, I put it in with my utilities. Utilities are difficult to budget for since they generally fluctuate so much. If you are going into the winter months, budget high for your heating costs. You can always adjust your budget in the spring. If you are just coming out of winter, take the twelve month average of your utilities and add ten percent. If your utilities have risen a lot lately, you may need to add more than ten percent. I’m also a huge fan of the budget plans you can sign up for. You pay the same amount each month which makes it a lot easier on your budget.
  • Insurance – car, homeowners, renters, disability and life. If you pay any of your insurance bills on a quarterly, semiannually or annual basis, divide your total insurance bill by the number of months the premium covers and include that amount in your budget.

Gather all this information. Add up all your committed costs and subtract the total from your monthly income. How much do you have left? Are there any expenses that shocked you? Sometimes you get into a groove of paying your bills and you really don’t look at them. Please feel free to post your comments and questions. I want to hear from you.

Please note: I reserve the right to delete comments that are offensive or off-topic.