Types Of Spending

Over the years I have talked to many people about personal finances and budgeting. But my neighbor is one of my favorite people to talk about finances. He is a loan officer for a local financial institution and has over 20 years of experience helping people with their finances.

One of our favorite topics is how to choose between “needs” and “wants”. It is an interesting test to ask people what types of things they could group as a need. Grouping wants is fairly easy. But when you ask someone “do you really NEED to spend your money on X” you would be surprised the responses you receive. My neighbor has an easy formula to distinguish between the two and here it is:

“A need is something that you DIE if you don’t have!”

Now this may seem overly simplistic and dramatic. But you would be surprised at how many people think that their “extended cable package with all the movie channel packages” is an absolute need! Or at how many people just HAVE to have that $4 latte and muffin every morning.

As you are creating your budget you will have to make decisions about what are your wants and needs. I am not judging how people should spend their money. I am guilty myself of some “frivolous” spending from time to time. But you need to make sure that your necessities are getting paid for first. And by that I mean not only food, shelter, and clothing but things like saving for my children’s college and saving for my own retirement. After all if I compare a trip to the convenience store every day to my child’s education it is not a hard decision to eliminate that daily Coke and a candy bar(you can send your child to college for a few dollars a day if you start saving early).

In “budgeting lingo” there are two types of spending: discretionary and required. Required spending are the bills that you just have to pay every month. Things like your mortgage or rent, auto fuel, utilities, groceries and monthly memberships. Discretionary spending is those items that you can choose to spend you money on or not each month. Things like clothing, eating out and entertainment. If you are trying to reduce your spending to pay off debts or to increase your investments the discretionary spending areas are usually the first to be analyzed.

Discretionary and required spending can then be split up into 2 additional categories. Periodic and monthly spending. Monthly spending are items that are paid each month, month after month. All the examples I have given so far are monthly expenses. Periodic spending are items that only come up once or twice a year like property taxes, insurance premiums, vacations and holiday expenses.

So as you are creating your budget it helps to group all of your spending into 4 possible categories. 1) Monthly Required, 2) Monthly Discretionary, 3) Periodic Required, and 4) Periodic Discretionary. By placing everything into one of these categories you can more easily plan your monthly expenses while at the same time have a plan for your periodic expenses. After all, I think most people are very good at planning for those expenses that come up every month. People get into debt when those unexpected (or expected) periodic expenses come up like Christmas, car repairs, or emergencies. So get your budget organized and you will be prepared for any expense that may come your way throughout the year.