I attended a grammar school dance with my daughter last night. Rather than providing food, the school setup food trucks where parents could choose what they wanted to eat. One of the trucks was serving ice cream and various other dessert items. Instead of pairing down their menu, the ice cream truck was offering milkshakes, gourmet coffees and sundaes you could choose from.
Needless to say, it was a disaster. There were entirely too many choices, which complicated order fulfillment resulting in long lines and wait times for paying customers. Although the ice cream ended up being pretty good, a complex menu resulted in efficiencies that could have been avoided with a simplified approach.
This same lesson can be applied to your budget. Being efficient with where your money goes and how you spend it is important. There are endless ways for you to spend every dime you make on a daily basis. Two easy methods can be applied, detailing your spending habits while helping you to make better choices.
Determine Fixed vs. Variable Costs
The majority of the items you pay for each month should be fixed. Meaning, there is no variation in the amount owed throughout the year. Great examples of this are: mortgage, internet, cell phone, credit cards, car loans and car insurance. All of these items should cost the same every month. Compare this with variable costs, which may include: utility bills, credit card payments and car loans.
You may have noticed, I included credit cards and car loans in both categories. This was on purpose. Making the minimum (fixed) payment on your outstanding loans is the best way to impede your financial success. Overpaying on these loans (variable) may not be possible every month, but attempting to pay more in order to reduce the balance is the key to your financial freedom.
In addition, your utility company may offer a program where you can “level out” your bill depending on your usage over the past year. This will allow you to have a similar amount due every month rather than getting hit with a large gas bill in the winter or conversely a large electric bill in the summer.
Categorize Your Spending
Using the ice cream truck as our example, it would be much more difficult to gain control of your spending if you’re attempting to keep up with 25-30 line items each month. Placing your budget items into categories helps. Use the following categories as a starting point:
- Housing
- Food
- Utilities
- Transportation
- Entertainment
- Social
This allows you to see what you’re spending each month prior to paying for anything else. Once categorized, add the dollar amount and a percentage beside each one. If you’re overspending in one category, ask yourself why and what can be done to reduce the amount.
Best case scenarios would include eating out less or canceling subscriptions you no longer use. More extreme cases could include the sale of an expensive car or even deciding to move in order to reduce living expenses and set yourself up for long term success. Understanding where your money is going each month will help you determine where you fall on the financial spectrum.
The good news is, I learned something else from the ice cream truck fiasco.
Certain things in life are worth the wait. Ice cream is one of them.
Sign up for our Sunday Spectator. Delivered to your inbox every Sunday, with all the news from the week.
