Your essential expenses are pretty much fixed so with the total amount you now have a number that can influence other decisions. The point of categorizing your expenses is to know how much you’re spending in each area. Once you’ve separated your expenses into the two categories, it’s a good time to add up all of the amounts in each category. Calculate How Much You’re Spending in Each Category Remember, the goal is to keep it simple so that it doesn’t feel like a burden every time you categorize your expenses. If it feels like a non-essential purchase label it as such.Īlso, it can be a good idea to write down everything that you think is essential and non-essential. There are likely to be a few transactions where you’re not sure if you should put it in the essential or the non-essential category.įor example, there have probably been times when you’ve bought clothing that was considered essential and other times when it would be considered non-essential.Įvery person is different so you should go with your gut on a transaction. Your non-essential expenses or discretionary spending are all of those purchases that enhance your quality of life. Here is a list of common essential expenses: Your necessary purchases or fixed expenses are all of those purchases that you must make to live. The goal is to separate those purchases that you absolutely need and those purchases that if you had to, you could go without. Would I spend my last dollars on this purchase?Īssume that whatever the purchase amount is, you have just enough money to cover that purchase. Starting out, you want to go through all of your spending transactions and label them as a necessary expense or a non-necessary expense. Starting with Necessities and Non-Necessities Unless you’re paying interest each time you make a payment (more info on this below), the money out and in transactions are just extra and you don’t need them.Īs you go through your transactions, make sure you’re not double-counting anything.Ĭredit card payments are the most common. You also have the money that came out of your bank account to pay off the credit card.Īnd, finally, you have the money that came into your credit card account. You have all of the purchases you’ve made with the credit card. That’s because they’ve been already counted in another area. Before You Start to Categorize Your Expensesĭepending on the way that you’re tracking your expenses, you may have some transactions that you don’t need. We’ll also cover some of the difficult aspects of categorizing like dealing with credit card payments. Then, categorizing by groups of similar purchases. This involves first categorizing your expenses as essential expenses or non-essential expenses. The easier it is to categorize your transactions, the more likely you’ll consistently keep track of your finances. You want to keep this as simple as possible while still getting valuable information. After you’ve created a way to track your income and expenses, the next step of organizing your finances is to categorize your expenses.
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