This seems like a pretty simple concept. If we were to use a child’s definition, a budget is a recording of your “Money In” and your “Money Out.” The goal is to make sure that the Money In exceeds the Money Out.
In a survey released by the Federal Reserve in 2015, the participants don’t seem to have received this simple budget message. Their Money Out exceeds their Money In. In fact, “Only 53 percent of respondents indicate that they could cover a hypothetical emergency expense costing $400 without selling something or borrowing money. Thirty-one percent of respondents report going without some form of medical care in the past year because they could not afford it.”
Back To Basics
Let’s take a step back and figure out what we are missing and why so many people can’t quite seem to manage to live within a budget. Return to our earlier definition. Most people have a certain amount of money coming in, and it is rather easy to figure that out. Salaries are easy. Commissions, part-time work, overtime and income from investments may vary, but you can put a conservative figure to them, a minimum that you can use for totaling the amount of money you can count on coming in. To stick to the budget, you have to make sure you don’t have any more money going out than coming in. So far, it’s as simple as that.
When you are dividing up your budget, figuring all the different directions the money will be going out is the real challenge. And, here’s where you come up against another financial concept: fixed and variable expenses. Fixed expenses, in business accounting, are those that you can’t do without and can’t easily change. Basic raw materials for a product are a fixed expense; electricity is a fixed expense. Variable expenses, in the business world, like research and development, can be extremely important, even vital to the success of the company. Nonetheless, they would still be considered variable expenses and would be measured according to the total budget.
Households have fixed and variable expenses, too, and so do individuals within those households. Shelter – your mortgage or your rent – is a fixed expense. So are certain types of food, clothing, transportation, and your kids’ education. Pretty much everything else is variable, and even within those fixed categories there’s room for discussion and change to lower fixed costs. Transportation is a fixed expense – if you live in the suburbs or in the country, you need a car. But you don’t need a luxury car. Electricity is a fixed expense, because you do not set the rates; however, you can influence its use.
“Fixed” Does Not Have To Be Fixed In Stone
Once you have the concept clear, and you’ve shown your family how it’s applied — and shown them that it will be applied — you can relate it to behavior, too. You can have – and you should – write them out, just as you write out your fixed and variable expenses when you’re making up a household budget. Negotiable and nonnegotiable rules of conduct should be defined; these are rules that can be discussed and perhaps modified if the kids can convince you of their point of view, as well as the rules that are absolute and not open for discussion. “Fixed” sounds like an immutable concept, and it is, for the most part – but even here there’s some room for judgement calls.
The Fixed And Variable Expense Quiz
Here is a quiz for the whole family to take. This is a list of things that a family might spend money on. Have the whole family discuss, and debate, which ones are fixed expenses and which ones are variable. Make sure that everyone is prepared to discuss the logic for their choices.
- College for kids
- Country club
- Designer jeans
- House payment
- Private school
- School books
- Sound system
- Summer camp
- Telephone (Mobile versus house phone)
- Tennis lessons
- Television / Cable
You may find that everyone’s choices are a little different. Chances are you’ll agree on certain basics – food, shelter, and clothing. Beyond that, what is absolutely necessary? A businessperson might include country club dues – perhaps some very important business contacts – are inextricably tied to the golf course. Tennis lessons? Suppose one of your kids has real talent, and tennis lessons can mean a college scholarship?
The point is the concept of fixed vs. variable – or necessary vs. unnecessary – expenses can be a straightforward one in business but subtler for a family. It’s important, for your kids and for you, to create a sensible framework, a solid context to which you can relate your value judgements. Ultimately, your kids will be able to use these basics to make some of their own life choices and to then build a workable budget to achieve their aspirations. The words of Dave Ramsey will ring true; “When you create a basic budget and stick to it, it will suddenly seem like you have more money.”