Adulting 101: Types of Costs on Your Personal Finance Journey
Americans are getting better at spending our money in the decade since the Great Recession. But wages aren’t as up as much as our spending habits.
Housing prices have also increased, which means Americans have to spend more to pay the rent or mortgage. It also means they have less discretionary income for movies, concerts, or even a drive-thru latte.
Knowing how much you pay in bills isn’t enough. You also need to figure out the types of bills you’re paying each month.
Read on to find out how looking at the types of costs in your budget can help you with your personal financial journey.
Fixed Costs vs. Flexible Expenses
Let’s say you pay $1,000 a month for rent. That’s a fixed cost. You can’t ask your landlord, “Hey, what if I paid just $750 this month?”
Things like car payments and credit card debt are also fixed expenses. You can pay more than the minimum on your credit card or car payment, but you there’s a floor for what you can pay to remain in good standing.
What about flexible expenses? The meaning of that term can be a bit, well, flexible. The cost of food is a good example.
We all have to eat food, but we don’t have to eat filet mignon for every meal. Similarly, we also don’t have to eat $1 frozen burritos from the gas station for every meal. Most people function fine somewhere in-between the two extremes.
Entertainment costs also fall into this category, though your Netflix and Hulu accounts aren’t as essential as eating. If you can’t watch Brooklyn Nine-Nine on weekends, you might get bored. But you’ll still be able to function.
How Much Should You Save?
The above categories aren’t the only ones you need to look at when making a budget. You should also set aside a certain amount for saving, investing, or both.
There’s an old rule known as the 50/30/20 rule. It says to devote 50 percent of your income to things you need, 30 percent to things you want, and 20 percent to savings.
Of course, the line between “wants” and “needs” can blur sometimes. The urge to splurge is a natural one. The key is to find a way to splurge without laying waste to the rest of your budget.
Business owners often look at the amount made after expenses. They then decide if they want to use that amount on things like office upgrades or employee bonuses. Even if you don’t have a business, it may help to think of your budget in a similar way.
What if you don’t make enough to save 20 percent of your income? That’s more common if you live in an area with high housing costs. Even then, putting $100 a month into savings and investing in a few penny stocks is a lot better than nothing.
Look Beyond Types of Costs
Once you’ve evaluated your types of costs, you may still not be making quite enough to feel comfortable in case of an emergency. That’s common. Don’t resign yourself to struggling for the rest of your life.
You may be able to save a little more than you realize. Check out our blog post on money-saving tips to find out more.
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