There are certain expenses that stay constant month to month. These expenses could be rent, utilities, car payments, mortgage, insurance payments, and so on, these are fixed expenses. For most people these expenses will be the biggest drain on their income, the rest of the expenses are variable expenses that change from month to month.
When building a budget, fixed expenses should be straight forward and your starting point to building a budget. Budgeting for fixed expenses is the easiest part of building a budget. No matter what happens, your fixed expenses will come due every month and you will have to honor your financial commitments. Keeping this in mind, it seems prudent to list your fixed expenses and allocate the necessary amount of income to pay for your fixed expenses.
If for any reason, you are not in a position to pay for your fixed expenses, then the obvious way to free up your income is to look at your variable expenses. These expenses could be entertainment, eating out, shopping, etc.
Allocate your expenses in two categories, fixed and variable. You should know your fixed expenses like the back of your hand. Once you know how much of your income is allocated to fixed expenses, you can work with the remaining to do as you please. Using this approach, you will get a realistic picture of how much you can save each month, instead of using an arbitrary number as a savings target. This arbitrary number may not be achievable which can be demotivating.
Knowledge of your fixed expenses can even help you plan for the whole year. Fixed expenses are not likely to deviate too much each month. However, keep in mind that just because fixed expenses are ‘fixed’ does not mean that you cannot reduce your fixed expenses. Do not rule out fixed expenses if you are looking at ways to reduce your expenses. Fixed expenses can often lead to biggest savings. This is due to the fact that you will not be changing your fixed expenses from month to month. If you cut back on your cable, then you are not likely to get cable again for months or years.
The added bonus of cutting back on fixed expenses is that it can be done without making lifestyle-altering decisions. Shopping around for cheaper car and home insurance just makes sense, why not get a better deal. You are still getting car and home insurance but at lower cost, thus unlocking savings.