Investment Glossary – Expenses
Spent money on a cup of coffee this morning? That’s an expense. Had to get a new windshield because some big truck on the highway kicked up a pebble that left a huge crack right in your line of sight? That’s an expense. Have to pay the mortgage every month until you finally get the house paid off 30 years from now, assuming everything else in your life goes right and your kids don’t get too expensive for you to care for and you never get laid off from your job and the cost of healthcare doesn’t become ridiculously expensive as you get older? Yup, that’s an expense too.
An expense is money that flows out of your household in order to pay for things you acquire. It’s pretty much the opposite of income, money that flows into your household for payment for things people buy from you. Both income and expenses can be for goods or services, so whether you’re talking about buying a bale of hay or paying someone to groom your cat, you’re receiving something in return. But once an expense occurs, you no longer have the money in your possession that you used to buy the good or service you chose.
Some expenses can be predictable, such as a mortgage, auto loan, or ridiculously expensive college tuition. They occur on a regular basis, have a payment amount that is predetermined by a contract you have signed, and are expected to be paid in full on a regular basis. When discussing how to build a budget, fixed and regular costs like this are often the first piece of the puzzle in determining where to spend your money on a regular basis. You may prefer to spend your money on going to waterparks or watching cheesy science-fiction movies, but prioritizing those types of things over putting a roof over your family’s head is going to have some long-term consequences that aren’t ideal, both on the financial side of things, as well as in what your personal life ends up looking like.
Other expenses can be unpredictable and vary from month to month.
Unforeseen medical costs for health issues you run into, car repairs, and home maintenance fall into this category. These also tend to be things that you need in order to keep necessities functioning in good order, but their frequency and amount may vary from month to month. Once again, these types of expenses should usually be prioritized over large amounts of cotton candy and buying a massive cartoon DVD collection, but your results may vary.
Now, you may think that by the time you’ve exhausted monthly fixed expenses and unexpected but necessary expenses that you’ve gotten to the point where you can spend freely on customized barbecue utensils and a lifetime supply of gumballs. But in doing so, you’re also inherently making a choice – and that choice is that your discretionary purchases come prior to your savings.
So rather than treating your savings as an afterthought, it may actually make sense to view it as an expense for the purpose of building your budget.
Saving for a down payment so you can buy a house? Get that money in before your gumballs. Trying to build up an emergency fund so you don’t have to tap your credit cards in the event of an emergency? Put it ahead of your DVD collection. Looking to sock money away into a 401(k) plan so you don’t have to work at some point in your life? Don’t go to the waterpark today. Savings isn’t a real expense in that the money stays in your control. But if you’ve ever heard the term “paying yourself first,” maybe if you view your savings as a payment you have to make, rather than simply holding onto whatever is left at the end of the day, it can help build the right mindset for a strong long-term savings strategy that can get your budget moving in the right direction.