Friday, 26 February 2016

P&L - Expenses

There are broadly 2 types of expenses you can incur in your own Profit & Loss (P&L) statement.

Fixed Expenses

This refers to expenses that are not easily changed although it is possible to reduce them. For example - mortgage, maintenance, rent, insurance, utilities, tax etc. If you lose your job or want to start saving much more of your income, putting in the effort & time to cull your fixed expenses can be worth it. Since fixed expenses typically represent the biggest chunk of your budget, the savings can be quite substantial.

For us, our main fixed expenses are mortgage, maintenance, utilities, mobile, broadband, cable TV, whole life insurance and tax.

Variable Expenses

This refers to your daily spending decisions such as dining out, shopping etc. While most variable expenses represent discretionary spending, some variable expenses represent necessities. For example, groceries and vehicle expenditure can vary from month to month.

For us, our main variable expenses are dining at restaurants, personal care appointments, shopping, groceries, public transport and petrol.

Budgeting

This is essentially the relationship between your income and expenses. There are many ways to approach budgeting but we generally apply percentages to our fixed and variable expenses. We track our fixed expenses and try to ensure that they do not exceed 40% of our monthly income. We do not track our variable expenses in detail but try to ensure that they do not exceed 20% of our monthly income. We usually work this out at the end of each month so it acts as a guide for the next month on which areas we need to cut back on. Basically, this approach means that we save at least 40% of our monthly income. How we allocate this 40% to our emergency funds, cash for investment, cash for big-ticket spending and general savings depends on our asset allocation strategy.

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