“Leveling” our Expenses

April 30, 2011

how to manage unexpected expensesI regularly teach in my Budgeting (“Spending Plan”) classes that our goal should be to turn as many of our Variable and Periodic expenses into Fixed (or “level”) expenses as possible.

A Fixed expense is one that occurs every single month at the same cost. Examples are rent or mortgage, car payments, 401(k) contributions, monthly bus passes and day care center bills.

A Variable expense occurs every month also, but the amount varies. Electricity, heating, gasoline, and groceries are among the most common variable expenses in our household budgets.

A Periodic expense, obviously, occurs less than monthly, irregularly or just once in a life time. Typical of this type of expense are medical-related charges, vacations, car or home repair, taxes, and most insurance premiums.

Because we are so used to our Fixed expenses, we typically do not spend that money. We know, subconsciously even, that we have to set a certain amount of money aside for our rent/mortgage or our car payment. Ideally, if we could turn all of our expenses into Fixed expenses, we would be better able to manage our money.

Here are a couple of easy ways to convert a Variable and a Periodic expense into Fixed expenses:

  1. Utilities: Most electricity and gas utility companies offer their customers the option of making the same payment every month. They simply average monthly payment for the past twelve months. Some customers have tried to tell me that  this is a more expensive option, but that is a myth.
  2. Insurance Premiums: Most insurance premiums are designed to be billed every 6 or 12 months. However, most may now be paid on a monthly basis. Be aware, though, that there is often a $1 to $5 monthly processing fee accompanying the monthly payment option.

Wouldn’t it be nice if our local grocery story or gas station would allow us to be on level pay at their establishment? Alas, I have not heard of such opportunities yet. Instead, it is up to us individually to put ourselves on level pay. This is called, of course, budgeting. We set aside a specific amount each month for our regular expenses.

Pay yourself regularly in order to be financially prepared for replacing appliances when they dieIt is up to us, as well, to look ahead and plan for periodic expenses. Your fridge may be working now, but if it’s already 12 years old, you probably ought to begin saving for your next one soon (“This Old House” has a nice list of average life expectancies of household appliances: click here). If you think it might cost you $1,100 to replace it, divide the expected expense by the number of months you probably have before it needs to be replaced, and you’ll find out what your Appliance Replacement level pay to yourself should be:  $1,100 ÷ 24 months = $46 we should be putting into our savings each month for our next fridge.

We should be doing the same calculations for our furniture (think couches, beds, tables, etc.), appliances, vehicle(s), etc…

In this way, we are “leveling” our Fixed, Variable, AND Periodic expenses so that we’re able to pay for supposedly “unexpected” expenses in cash, by check, or using our debit card, thus avoiding the additional expense of paying interest to store creditors and credit card companies.

Please feel free to share how you’ve converted some of your own Variable and Periodic expenses into Fixed expenses.

Best wishes for continued improvement in your own personal finances!

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Advertisements
Published in: on June 2, 2011 at 3:41 pm  Leave a Comment  

The URI to TrackBack this entry is: https://day2daymoney.wordpress.com/2011/06/02/leveling-our-expenses/trackback/

RSS feed for comments on this post.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: