Realizing, Where Your Money Goes - Global Edulink...If you don’t want to buy anything new to save money, you can just make sure that you unplug things that you are not using. You

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Module: 2

Realizing, Where Your Money Goes

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2.1 Fixed Costs

2.2 Monthly Costs

2.3 Non-monthly Costs

2.4 Flexible Spending

Intended Learning Outcomes:

To learn about what fixed costs are.

To learn about the different types of monthly costs.

To learn about the different types of non-monthly costs.

To learn about the importance of setting essential costs before deciding on flexible spending.

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2.1 Fixed Costs

Nearly every home or family will have a set of fixed costs that they must pay regularly.

Unless you live in a cabin in unmapped territory and are completely off the grid, you will usually have

bills to pay.

Bills are a part of life. But paying these bills delivers you the services that you need to live a comfortable

life in a temperature controlled environment. They also allow you access to essential services like

doctors and hospitals.

Essentially, fixed costs are anything that you simply cannot maintain your quality of life without.

Determining your fixedexpensesfrom your flexible expenses is important because it will help you

figure out what can be trimmed or cut if you are trying cut spending or save money. Understanding

what money must be allocated to your essential expenses every month will help

you understandhow you can make the most of your money.

2.1.1 Housing

Your housing costs are a necessary part of your monthly expense. You know that you need a place

to live regardless of all the rest. However, your expenses will be broken down

differently depending on whether you rent your home or own your home.

Renting

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If you rent your home, you will need to allocate enough money every month to cover your rent. In

most cases, your rent will be non-negotiable. Paying it on time is always in your best interests

because it will affect your credit score and your references. If you pay your rent late, even

occasionally, it can reflect badly on you if or when you need to move.

Rental contracts are often negotiableifyou have the references and credit to support you. The

deposit that you will pay can be determined by your credit score in some cases. If you have pristine

credit and great references, many landlords and agencies will not make you jump through so many

hoops to be approved for a rental house or apartment.

When you are renting a place, you should be sure to be careful to research the rental prices in the

local area. In many places, landlords are allowed to put the price at whatever they like. This means that

you can find beautiful homes at affordable rental prices and truly horrific holes in the ground at

unrealistic prices.

Your monthly rent should be appropriate for the location and condition the property. But it should

also be appropriate for your income. A good rule of thumb is to avoid renting a home that costs more

than 50% of your monthly income after taxes.

Owning

Owning your own home is exciting but it definitely comes with its own unique challenges. When you

own your own home, it will be your mortgage that is your primary fixed expense.

When homes are for sale on the market, they are often sold at around the price that they are

appraised at. Though, in high demand areas, they may be sold for much more than their worth.

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Similarly, in low demand areas, some homes are sold at a loss just so they can be moved. When

you are buying a home, you should be cautious about your mortgage payments

A mortgage is a more cost effective way of living than rent because a mortgage is often lower than

rent prices and it allows you to develop assets.

2.1.2 Loan Payments

Loan payments are another fixed expense. Although the mortgage is one of the biggest loan payments

you might make, there are still plenty of others.

Loans may include car loans, school loans and personal loans. These loans will have fixed payments

every month.

Loans are regular part of life for most people. Most people do not have $30,000 to spend on a new car

upfront. That is completely fine and does not mean that you have poor finances.

In fact, loans are a good kind of debt because they help you build credit for later in life.

Loan payments are usually due monthly with a fixed price. However, you can usually pay more

than the minimum payment. If you budget in an extra $50 on top of your minimum payment, you

can actually pay your loan off faster and pay less interest.

2.1.3 Insurance

Insurance is another essential part of living. Most insurance in mandatory, no matter where you

live. If you own a home or drive a car, you must have insurance according to the law.

Insurance protects you and your investment from serious damage.

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Your insurance policy is not necessarily the place to scrimp and save. However, you should be

making sure that you are getting a fair price. Before you purchase insurance, you should be sure

to shop around. You want to compare not only prices but the services and ratings that accompany

each different insurance company. It is your insurance policies that can help you out if you are in a

real bind, so it is important to find a good one.

If you already have policies and you are happy with the service you provide, you should always

make sure that you ask about anydiscounts that you might qualify for. For example, some auto

insurance companies give out discounts for every year that you go without making a claim. This is in

their best interest because the less you claim, they less they spend. As a result, they will often

reward you for living mindfully.

If you have a mortgage, you will also need an insurance policy for your home. This is a legal requirement

because it protects the home and the bank in the event of fire or another catastrophe.

If you live in rented accommodation, it is a good idea to have rental insurance. This is a great idea

because it will protect your things in the event that something happens to the building you rent. If there

is a fire or a flood, the building will be covered but that coverage will usually not extend to your

furniture, electronics and other possessions.

Health insurance is another essential part of your fixed costs budget. In many places, health insurance

is a requirement. While it can feel expensive or unnecessary, it is ideal to have in the event that you get

sick. If you are one of the lucky people who only sneeze every three or four years, you can consider

getting a health insurance policy with a high deductible. This will often lower your monthly payment,

which is ideal if you never use the policy.

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2.2 Monthly Costs

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Now that you’ve thought about the costs of all of your fixed living costs – those things you cannot legally

live without- you can begin to think about your monthly costs.

Your monthly costs often come in the form of bills. They differ from fixed costs because they can often

vary from month to month, where as your mortgage will remain the same for the length of the loan.

But whether you get them in the mail or by email, bills are rarely fun. However, the nice thing about your

bills is that you are more in control of them than you think.

2.2.1 Utilities

Your utility bills are also an essential part of living. You will need to pay some service provider to help

you take care of your electricity, heating, cooling, water and waste. If you live in a city, in the country

or even on a mountain, you will need a utilities provider to make your living space a hospitable place to

be.

Your utility bills are rarely fixed. This is both a blessing and a curse. It means that in the winter, your

electric bill might sky rocket as you try to keep warm in doors.

But you are in control of how much you consume. Being proactive with yourenergy usage can

help keep your bills down and help you save on these essential monthly costs.

For example, you can use energy efficient lightbulbs or appliances. If you don’t want to buy

anything new to save money, you can just make sure that you unplug things that you are not using.

You should also make sure that you always turn off all the lights when you leave a room. Each of

these simple things can help you both actively and passively save energy.

2.2.2 Entertainment Bills

At this point, many people have ditched their landlines in favor of a single cellphone. And why not? You

can only take your landline to your front door but with a cell phone, you can be contactable everywhere.

Your cell phone bill is another monthly cost and most people consider it to be essential. However, you

will probably notice that despite your fixed contract price, some carriers have a tendency to nickel and

dime you. This is especially true if you breach any of your limits.

You can save money on your cell phone bill relatively easily, you just need to be honest about what

kinds of services you need. If you spend almost all day on Wi-Fi, you probably won’t need the XL

Deluxe Data Package that mobile carriers offer. A simple data service plan will often suit you, as long as

you monitor your usage.

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You might also consider purchasing your phone upfront. Much of the cost of mobile carrier’s bills

comes from the phones that they give away “free” when you sign up for a contract. In reality, you can

buy phones upfront and then purchase a service only contract or SIM card service.

Another entertainment bill include TV and Internet packages for the home. Again, you are in control

of how much you spend on these services.

Some services might offer you rock bottom rates when you sign up if you are willing to stay with

them for an extended period of time. You should always be sure to check out how much the price

increases to after a certain period of time. Then, you should do the math when you compare plans.

You might find that despite the low promotional prices, the regular price makes the whole deal less

affordable over a long period of time.

Additionally, if you are trying to save money on TV and Internet, you should consider how badly you

need them in the first place. Companies like Netflix and Hulu offer many common programs online at

a far discounted rate compared to cable and satellite companies. If you do not need to watch the

latest episode of Grey’s Anatomy on the day that it airs, it may be worth your while to consider other

online TV alternatives, especially those that do not lock you into a contract.

2.2.3 Credit Card Payments

If you have balances on your credit cards, you will be making monthly payments on these as well.

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The reason that credit card payments are not fixed payments is because they will change depending

upon your credit card balances. Credit card payments are also high priority because they can

have hugeinterest rates attached to them.

It is usually in your best interest to budget out more than enough money to pay your credit card bills

every month. If you can’t pay off the entire balance, it is usually good to pay more than the minimum

payment. This will help you pay them off faster and help you avoid drowning in high interest debt.

Credit cards can be one of the most difficult parts of managing your finances. You will learn more

about dealing with debt in Module 3 of this course.

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2.3 Non-Monthly Costs

There are costs associated with living your life that are essential but do not come with a formal bill.

These costs can include food, transportation and home maintenance costs.

The reason that these are non-monthly costs is because rather than spending money once a month on

them, you will find that you are buying food, gasoline or household supplies regularly instead of

monthly. In fact, you may not have a fixed date for buying these things at all. Additionally, the amount of

money on that you spend on these purchases will vary every month.

However, they are still an important part of living because let’s face it, you need to eat. Buying food to

eat and gasoline to get to work is a daily part of life and therefore is not yet flexible spending.

But like the other costs you learned about, you are still in control of how much you are spending,

even if you do have a growing family that seems to be eating more every week.

2.3.1 Food

Food costs can be crippling for many people because they are essential. You have to feed yourself

and your family, if you have one. It is not just a part of a government bureaucracy, it is for your own

survival.

Food costs may seem like they are draining you but if you shop with a purpose and a plan, it can be

easier to manage these monthly costs.

For example, you would make all attempts never to go food shopping when you are hungry. This is a

rule that is great to live by because your hunger might cause you to make impulse purchases on

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things you do not need. You might also end up buying too much food, some of which may spoil

before you ever even getting around to eating it.

Additionally, you need to come prepared with a list. While a meal plan is an excellent idea for managing

that list, the list needs to include other staples that you need as well.

A grocery list benefits you in two ways. First, it prevents you from straying into the aisle where they are

selling 2-for-1 Oreo’s unless you need to be there. The second way it benefits you is that it helps you

avoid forgetting anything.

Forgetting something at the store is difficult not just because it is inconvenient. When you forget

something important at the grocery store, you have to spend more money to get back to the store. But

more than this, you are more likely to pick up impulse items when you make a second trip to the

supermarket. This is because it may feel silly to go in for only one thing or because there are great deals

or sales going on that you missed before.

2.3.2 Transportation

Your transportation costs will vary depending on the mode of transport that you use. If you live in the

city and commute by public transport, you will have a different budget from those who commute long

distances by car.

Public Transportation

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If you take the bus, subway or train to work, you get a lot of benefits. Not only can it cut down your

commute time but your transportation costs are often more fixed than those who drive or get

around another way. Most cities do not randomly adjust the prices of the public transportation

systems, so it is easier to plan these costs.

Public transportation is inexpensive in some ways but you still need to budget for it. You should always

be coming up with a good estimate of how much you should spend on public transport.

Additionally, you should find more ways to make your money work for you. Some cities offer schemes

that allow you to get discounts when you are a frequent traveler on the city system. Some also allow you

to get discounts at some businesses when you show your metro card or bus pass. It is always worth

finding out whether your city’s public transport system offers any rewards!

Going by Car

A car gives you freedom and mobility but it is a responsibility in itself. Driving is expensive because

you have to pay not only for the car, the insurance and the gasoline but the wear and tear and on the

vehicle itself.

When you are making a transportation budget for the car, you need to think long and hard to make

sure that it is inclusive. Car ownership goes much further than gasoline and it is important to plan

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for the maintenance of your car. Maintaining your car not only makes it safe to drive but a well-

functioning car also has better gas mileage.

The biggest regular expense that you will have will usually be gasoline. This is hard to prepare for

because gasoline prices fluctuate so much. However, you can gauge how much gasoline you use

each month by collecting all of your receipts on a typical week, adding them up and multiplying them

by four.

You also need to worry about routine maintenance like oil changes. You should not skimp on oil

changes because doing so is bad for your car and ultimately your wallet. You can always ask your

mechanic if they offer discounts for booking in advance. This is a good way to build up a good habit of

changing your oil every few months or as needed.

Tolls are another expense that is involved in owning a car. If you have a toll system at work on the roads

you use, you need to budget for how much money you will spend there. Tolls can cost you $5 a day

which is $80 a month if you drive to work every day.

Finally, you need to think about parking. Even if you have free parking at home and at work, you will

need to consider parking elsewhere. You should either put aside some money every month for parking

or get familiar with all of the free parking available in your local area.

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2.3.2 Home Maintenance

Home maintenance costs can also be difficult to measure. While big costs from damage will often be

covered by insurance, there will be things that you need to do to maintain your home.

The costs of plumbers, repair men and other contractors will usually come out of your own pocket.

Though you cannot, and will not, usually be able to plan for these things, you can find creative ways to

offset unexpected expenses by putting aside part of your monthly budget for potential home repairs.

That way, the money is there if you need it. If not, you can roll it over to the next month.

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2.4 Flexible Spending

Flexible spending includes all of the other things that are not previously mentioned. Usually, flexible

spending includes things that are not necessary for your daily life but instead make life a bit more

enjoyable.

Flexible spending can include food, dinners out, entertainment, clothes and hobbies that you might

spend money on.

Flexible spending is a lot easier to master after you have figured out what to do with the essentials. This

is because you can then go on to enjoy all of the fun things in life without having to worry about how you

will pay your bills later!

Once you have realized how much money you need to live comfortably, it is easier to figure out how

much you can spend to make life more fun!