If you’ve read the article last week, you know that you need to give your dollars jobs, but how do you decide what jobs are necessary in your life?
You use the second YNAB rule to figure that out. “Embrace Your True Expenses” tells us that we need to fully understand our expenses, and not just the regular bills.
You can read the rest of the series here:
- What is YNAB
- What is the Purpose of Your Money?
- What Are True Expenses?
- Make Your Budget Fit Your Life (not the other way around)
- Aging Your Money
What are “true” expenses
I think most folks have a pretty good idea of what their regular monthly expenses are. Keeping track of things like rent and utilities is usually pretty easy. But to budget fully, we really need to make sure we have a plan for everything we are going to spend money on. So what other kinds of expenses do we have that we need to give categories?
I like to think of expenses as four different kinds of expenses:
- Regular and Frequent
- Regular and Infrequent
- Irregular and Frequent
- Irregular and Infrequent
A “Regular” expense is one where you always know how much you are going to spend. “Irregular” means the amount can vary. “Frequent” means monthly, and “Infrequent” is less often then that. What are some examples of these expenses?
- Regular and Frequent - Your bills like rent, cell phone, and cable
- Regular and Infrequent - Bills that happen every six months or a year, like car insurance premiums, or annual subscriptions
- Irregular and Frequent - Your bills like electricity (the amount varies from month to month) or expenses like groceries
- Irregular and Infrequent - Emergencies. If you own a car, I can guarantee you are going to have a car emergency, but I can’t predict when it will happen, or how much it will cost, so it belongs in this category.
When you have accounted for your expenses in all four of these categories, you can say that you have “embraced your true expenses.”
Why do we follow this rule?
It is helpful to follow this rule, because it allows us to smooth out our budget. If we know we have a car insurance premium payment coming up in five months for $300, we can start saving in that category now, so when the expense comes up we already have the money budgeted. Saving $60 per month is way easier then trying to come up with the full $300 in the moment, don’t you think?
It helps with our variable categories too, like groceries. We can start getting an idea of how much we really spend on groceries over time, and therefore we’ll get better at making guesses at how much we need to budget for it. That also helps us smooth out our budget over time.
And lastly, we can start saving for our emergencies. We know they are going to happen, so how much do we need to save into that category to feel secure? Making that decision depends entirely on how secure you want to feel in your situation. For your car emergency category, think about what makes sense. Do you have a brand new Toyota with a three year full warranty on it? Maybe you don’t need much in the category. Or do you have a twenty-year old jolopy? Maybe you would feel more comfortable with a large fund for that.
Again, one reason to have a budget is to reduce the surprises, and to smooth out your budget. Embracing Your True Expenses is the rule that helps us make that happen!