(SUPER: 3. BUDGET BREAKDOWN)
16:25:05 Tonya (CON'T): So let's kind of switch gears into understanding how a budget breaks down because debt elimination might just be one part of your budget, but there should be other elements of your budget. And so we have our fixed expenses; we have our variable expenses. Eric, do you want to cover that? Because I know you probably work with people on that all the time.
13:19:45 ERIC: Yeah, absolutely. I like to think about three different categories of expenses. So fixed expenses, that's like the bills, right. That's the stuff that happens every month, the amount doesn't change. You can probably start rattling some of these things off like clockwork.
13:19:58 KAMEREN: Yeah, your mortgage.
13:19:59 ERIC: Exactly.
13:20:00 TONYA: Car payments.
13:20:00 KAMEREN: Car payments.
13:20:01 TONYA: Student loan payments.
13:20:03 KAMEREN: Your utilities.
13:20:04 ERIC: Yep, cell phone bill.
13:20:06 TONYA: Health insurance.
13:20:06 ERIC: Maybe gym membership. Any monthly subscriptions you have. So pretty straightforward stuff, right. You probably know exactly when they happen, exactly how much they cost. It's not rocket science at that point.
13:20:16 TONYA: Yeah.
13:20:17 ERIC: So those are fixed expenses. But think about variable expenses, those are things that happen every month too, but the amount that you spend on them tends to fluctuate, right. An example that's pretty common for people is groceries, right.
13:20:29 TONYA: Mm-hmm.
13:20:30 ERIC: So I know that some people out there tend to be really creatures of habit. But it would be pretty rare if somebody's grocery bill was the exact same every single month, right.
13:20:38 KAMEREN: Right, right.
13:20:39 TONYA: They are structured.
13:20:41 ERIC: Right, absolutely. So it's those things that you know are going to happen every single month, but it's not always the same amount. Groceries, like I said, dining out's a big one.
13:20:50 KAMEREN: Your entertainment budget, whether it's going to the movies or coffee, your ride share. I have a customer that her son uses a ride share company every day from school. So that's a variable expense, but in her mind that might be a fixed expense. So when you're going through your budget and you're looking at what are fixed expenses versus variable expenses, I mean, now is the moment of truth. You have to scrutinize that really carefully so you don't have those in the wrong categories.
13:21:33 ERIC: You know, I think a clear takeaway when you're thinking about how to categorize fixed or variable expenses is if it happens every month and the amount does not change, then it's a fixed expense.
13:21:41 KAMEREN: Right.
13:21:42 TONYA: Yes.
13:21:45 ERIC: If it happens every month, but the amount fluctuates, variable expense.
13:21:48 TONYA: Such as electricity bills.
13:21:49 ERIC: Yeah, yeah. So like electricity, gas, water for the apartment of the house, good examples. Those, I mean, I just tell people "Go with your gut." If you feel like they're stable from month to month, maybe they're more fixed expenses for you. If you feel like they fluctuate wildly, then choose to call them variable expenses.
13:22:06 The tricky thing with variable expenses though, Kameren, is how do you know how much to estimate for your groceries or your dining out? So a tip that I can give people typically is go back and look at your bank statements, right. Get a three-month average of what you have been spending, specifically on those variable expenses. The bills are easy, right. Those are the same amount every month. They may not be easy, but they don't change in terms of how much they cost, right.
13:22:31 TONYA: Yeah.
13:22:33 ERIC: But if you get a three-month average on what you typically spend on dining out, then if you decide later you want to make any changes, you know, "All right, what's a reasonable goal I can set for myself about how much I can reduce spending?"
13:22:46 TONYA: Yeah, I'm happy you pointed that out, Eric, because it is important. I think that that's what confuses some people about their budgeting process. I know what my fixed expenses are, but what about these expenses that change each month? How do I plan for that? And then we have something else, which is the non-monthly expenses. So do you want to go into that?
13:23:03 ERIC: Yeah, yeah, absolutely. These are tricky. Sometimes I call these "Budget Busters" because we know they're going to happen, but most people don't plan for them, right.
13:23:12 KAMEREN: Right.
13:23:13 ERIC: So these are the things that don't happen every month, as the name suggests, right? But they tend to be larger expenses and you know they're going to happen. So an example might be you've got to save the date for wedding that you're just going to be attending in six months. You start thinking about all the different costs that are going to factor in that you're going to need to save up for: Hotel, maybe airfare, if you need any new clothes for the wedding, a gift, of course.
13:23:40 TONYA: Yeah, you can't show up emptyhanded.
13:23:42 ERIC: Exactly, yeah. But it all starts to add up.
13:23:44 KAMEREN: Right.
13:23:45 ERIC: So if you start to add up the numbers and you realize, okay, "I'm going to need $300 for this wedding and it's in six months." Pretty simple equation -- when it comes to non-monthly expenses, I always tell people, "Take the total amount you need to save, divide it by the number of months you have to save for it, and there you have the number that you should be setting aside for that expense every single month." It doesn't happen every month, but you want to save for it like it does.
13:24:10 TONYA: Yeah, definitely, because you're spending that money some way or another. The money is being spent. Now whether you allocate it in your budget or not, that's another thing.
13:24:18 ERIC: That's right.
13:24:19 KAMEREN: Vacations and holidays.
13:24:21 ERIC: Yeah.
13:24:21 KAMEREN: Especially Christmas. We know Christmas is coming every year, that doesn't necessarily have to be a budget buster if you prepare for it.
13:24:29 TONYA: It catches some people by surprise.
13:24:30 ERIC: Yeah.
13:24:32 KAMEREN: Right. It's not a non-monthly expense, but it's a yearly expense we should put into the budget.
13:24:38 TONYA: Yes, absolutely.
13:24:39 ERIC: Totally. So if you think about, all right, maybe an exercise to go through, reflect on how much you spent last year on Christmas gifts, right? There's no hard and fast rule that says you're going to spend that same amount next year on Christmas gifts, but it might be a good starting point to think about. So if you know how much you spent last year, take that number, try to save up for it. Divide by the number of months you have left until Christmas and there you go.
13:25:02 TONYA: There you go.
13:25:04 KAMEREN: How much did you spend last year? No, don't answer that.
13:25:06 ERIC: I got easy overhead. You don't see a ring on my finger.
13:25:10 KAMEREN: Okay, don't ask me.
13:25:11 TONYA: The ring changes everything.
13:25:14 ERIC: That's right.
13:25:13 KAMEREN: My little boy turned -- he's three, so we went pretty hard last Christmas. So my budget's going to have a little break this year.
13:25:21 TONYA: And actually, my husband and I, we were moving across country, so the year prior we said, "We're not going to exchange Christmas gifts this year." Well, last year, that was last year, but this year we exchanged Christmas gifts and I felt like we had some making up to do for last year. We spent a little more than normal, but we had to plan for that and we had to make sure that we were including it in our budget.
13:25:40 KAMEREN: I was going to say, was it in the budget?
13:25:41 TONYA: Yes, because --
13:25:42 KAMEREN: Well, then there you go.
13:25:42 TONYA: You know, you spend more money on one end, then it has to come from somewhere.
13:25:45 ERIC: Yeah. I often think about like all your expenses is like a long balloon, right?
13:25:51 TONYA: Yeah. (INSERT BALLOON GRAPHIC ANIMATION)
13:25:52: ERIC: There's a certain amount of air that's in a balloon, whether it's evenly distributed or whether you're squeezing one end of it and the other end's getting fatter, it's at the end of the day, it's the same amount of air, right.
13:26:04 TONYA: Yeah, it is. It's a lot of money.
13:26:06 ERIC: So whether you have a big Christmas budget and you choose to cut back on dining out to save for it, at the end of the day, as long as there's the same amount of air in your budget, you're spending the same amount, that's what's most important.
15:36:24 TONYA: So we've spoken about fixed expenses, variable expenses, and non-monthly expenses -- but what about the emergency fund?
15:36:31 ERIC: Yeah, emergency fund, very important goal I think everybody should have right? So you think about what it is, it's just a separate savings account that you have set up to protect you from those things that you really can't anticipate. So four big ones that I like to think about: job loss, unexpected medical expenses, unexpected car repair, and unexpected home repair right.
15:36:55 So those are the big reasons why you need an emergency fund. In terms of a dollar amount, it really you want to look at it in terms of what your monthly spending looks like. So six to nine months of essential spending right? So that might not include all the dining out, all the ride sharing stuff, but it definitely includes keeping the lights on, keeping a roof over your head, making a minimum payment on all your debts, things like that, right?
15:37:22 TONYA: Yeah.
15:37:23 ERIC: So you figure out what that totals for a month, multiply it by anywhere from six to nine months and that is your goal to shoot for, for the emergency fund. Because what we've been talking about with fixed, variable, non-monthly expenses, these are all things that you can kind of foresee and anticipate. But you know there are some things that you can't anticipate.
15:37:42 TONYA: Yeah, life just happens sometimes.
15:37:44 KAMEREN: Right.
15:37:44 ERIC: It's almost to the extent, you don't know, you may not know when an emergency is going to happen but you know that something's going to come up.
15:37:52 TONYA: Yeah.
15:37:53 ERIC: Right, and so that's what the emergency fund is there for. So I mean it's key that you have it, start saving for it today, work up to it over time.
15:38:03 TONYA: Let's start today!
16:27:12 Tonya: We've identified your different types of expenses and how to break down a budget. Let's have a look at what we've learned...
(KEY TAKEAWAY BULLET POINTS APPEAR FULL-UP)
