Personal spending can be categorized into fixed, periodic, and variable types. Fixed spending includes rent/mortgage, school fees, taxes, insurance, utility bills, groceries, etc. Periodic spending may include subscriptions (TV, newspapers, etc). Variable spending may include vacation, gifts, hobbies, etc. These are the spending which you may not be able to avoid. So, you need to plan your budget every month.
There is yet another type of spending called discretionary. It happens at the spur of the moment. For example, you may consider a trendy watch, an expensive piece of jewelry, a luxury item, or an unexpected weekend out with friends. This spending may not be a part of your budget.
Earnings and Spending
Make a list of spending in each of the categories listed in the first section above. Calculate the net spending.
You can also make a list of your earnings. They may include salary, stocks and bonds, rent (if you have a property), a small business, freelancing, etc. Calculate the net income and match it with your net spending. The difference will be the money you have for saving or spending outside the scope of your budget.
What about emergency spending? For example, you can think of that as necessary car repair, equipment and appliance breakdown repair, and medical spending. Of course, you may not be able to estimate the exact value of spending. However, you can reserve a part of the fund to spend every month. The recommended method is to discuss this with your spouse, so you can plan better.
Your prioritization should be in the order of fixed, periodic, emergency, variable, and discretionary spending. It helps you balance your life without worrying about going penniless when the need for funds arises.
At times your priority may change unexpectedly. For example, emergency medical spending may exceed your budget. Having insurance coverage can help you during such a crisis. If you or a family member has a medical history, your priority for health insurance has to move up the order.
If you have an old car or a motorcycle that is susceptible to frequent breakdowns, priority for replacing it with a new one moves up the order. It may include down payment and EMI. Similarly, you may think of old and poorly functioning home appliances, gardening equipment, etc. So, it is a recommended practice to check the condition of appliances and equipment regularly. You may be able to avoid unnecessary replacement costs when it is possible to repair them.
Priority Shifting and Balancing
Having a shoestring budget for variable and emergency spending may make your life highly disoriented. The recommended remedy is to increase your earnings. For this, you may have to take up a part-time job, make investments, start a small business, expand your business, or get into freelancing on weekends.
Enhanced income gives you the freedom to add discretionary spending into your budget. You can also avoid the constant feelings of restlessness, irritation, and discontentment from your life. The recommended practice is to keep your earnings 20% to 30% higher than the net spending from all the categories.