There are a few key ingredients to building wealth. These include your income, expenses, savings rate, rate of return and time. I will go into several of these topics in later posts. But for today, I wanted to focus on expenses. And, specifically, fixed expenses.
Generally, to build wealth, you can either increase your income or lower your expenses or both. It’s important to keep your expenses low. Expenses come in two flavors: fixed expenses and variable expenses. Fixed expenses are those that recur every single month at a fixed payment. Bought a new car? That’s an example of a fixed expense. Every month, you have to make your monthly car payment. Student loans, mortgages, are all examples of fixed expenses.
Sometimes you can negotiate to lower your fixed payments. Perhaps you don’t need all those amenities on your cell or cable bill. Try to negotiate to lower your fixed expenses where you can or shop around for better alternatives.
Variable expenses are those which vary in payments every month. Depending on your budget, these may include food, gas, entertainment and one-time costs such as those for a vehicle repair, or purchasing a gift. Even though these costs vary, you can sometimes have a general idea of how much money you spend per month on variable costs. However, regardless of whether the expense is fixed or variable, it’s important to keep those costs low.
My Fixed Expenses
I’ve been trying to figure out my savings rate, which has proved a little more difficult than I expected. So, I’m still working on it. The issue has to do with determining what my income is. But, I was able to determine what my fixed costs are. Part of my problem was that on my spreadsheet, I would list my monthly contributions to my dividend portfolio, and my Roth IRA as a monthly expense. I still do, as that is my way of paying myself first. I treat those items as fixed expenses, meaning that it’s mandatory that I do that every month.
However, in an effort to figure out my actual fixed expenses. I temporarily redid my spreadsheet to only focus on the traditional definition of fixed expenses. It turns out that I am in pretty good financial shape where that’s concerned.
Currently, I calculate my fixed expenses at $1879.49. That includes a mandatory payment to my student loans per month of 97.61. Now, I try to pay a minimum of $1997.61 to my student loans per month, so when I get rid of them in October, that extra money would likely be devoted to savings and investing (or a down payment on a house). I also recognize that some fixed expenses I have now will be substituted for other (perhaps larger) fixed expenses in the summer. I do believe my income will be adjusted accordingly to meet the upcoming change in my job assignment, and I might even come out ahead. But, as of today, I’m very encouraged.
The lower you can reduce your expenses, the higher your savings rate will be. I’ll be talking more about these concepts and going more in depth will concrete examples in future posts. I just couldn’t contain my excitement realizing that, other than my mortgage payment (which I contend is making me money every month), my fixed expenses are quite low.
What do you think? Do you calculate your savings rate every month? Do you know what your monthly expenses are? Let me know by commenting below.