Saving Money – How to Organize Expenses

In the earlier article ‘How to save money‘, we discussed about how important it is to be aware of your spending in order to achieve financial success. Here we will learn about the nuances of the expenses we make and how to organize them to understand our actual living expenses.

In order to understand your financial situation, you should be aware of your income, all your expenses and how to categorize and record them. Although there are various advanced tools available in market, a simple pen and paper is enough to get started. Below information may give some idea of different types of expenses and how they should be recorded to be aware of your financial situation.

Gross salary vs net salary
Gross salary is the salary before any deductions. In simpler words, gross salary is the total Cost to Company (CTC). But it is not what you really get! Net salary is what you get in hand. Gross salary (CTC) minus PF, ESI, professional tax, income tax deduction at source etc. becomes net salary. So, while taking your income into account consider your net salary, not gross salary.

Organizing expenses:

  1. Recollect all the expenses that you make and prepare a list of expenses. Expenses can be rent, current bill, paper bill, phone bill, Internet bill, food, loans, entertainment, transportation etc.
  2. Categorize the expenditure items into Fixed, Periodic, Variable, Discretionary and Contingency expenses.
    • Fixed expenses
      These expenses are not avoidable and will be the same for few months/years. You can predict these expenses every month. Rent, paper bill, chits, loan payments, insurance, tuition fee are few examples.
    • Variable expenses
      These expenses will be changing and will be in your hands to control. Electricity bill, phone bill (post-paid), books, food, transportation charges are few examples.
    • Periodic expenses
      These expenses are not paid on a regular monthly basis. Though they may fluctuate month to month but over a longer period of time they are predictable. Birthday gifts, clothes, medicines etc., are few examples.
    • Discretionary expenses
      These expenses are non-essential. Entertainment, movies, vacation, going out to eat etc., are few examples.
    • Contingency expenses
      These expenses are not expected. These expenses cannot be planned. It may happen or may not happen. Marriage, hospital expenses, some family expenses, car repairs etc., are few examples.

Now that you know how to organize the different types of expenses, you can start calculating your expenses to know your financial situation. In the next article, Saving Money – Understand Your Spending, we will discuss on how to track these expenses using a simple and effective ‘Spending Analysis and Annual Expense Categorization’.

 

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