Expense categories
How to effectively categorise expenses to see where the money goes.
Expenses: This is the money spent during the month. Like income, expenses can, and should, be organized. It helps to understand exactly where cash is ‘running away’ and how you can optimize your budget. In Poland, where the cost of living can be different than in your home country, it is extremely important to monitor your expenses closely.
We divide expenses into:
- Fixed expenses: These are monthly costs that do not fluctuate much and we pay them regularly (usually monthly, sometimes quarterly or annually, but they are predictable). E.g. flat rent, loan instalments, fixed telephone or internet subscription, insurance (if paid monthly). Even if their amount is always the same, they should be budgeted.
- Variable expenses: These are monthly costs over which we have control and whose amount can vary. E.g. electricity, water, gas bills (depending on consumption), food expenses, transport (fuel, public transport tickets if you do not have a monthly subscription). These expenses are under our control and we can actively reduce them.
- Discretionary expenses (i.e. ‘pleasure’ or ‘whims’): These are monthly expenses that you incur at your own discretion, they are not essential for survival but enhance your life. E.g. going out to the cinema, café, new clothes (if not necessary), hobbies, gifts, holidays. We can dispense with these or reduce them if the budget requires it.
We can also divide expenses by type of expenditure:
- Daily necessities: These are basic expenses that are difficult to live without.
- Examples: food, hygiene items, cleaning products.
- Charges (bills): Compulsory, regular payments.
- Examples: gas, telephone, water, electricity, refuse collection, rent to a cooperative/community, monthly public transport ticket, internet/TV subscription.
- Debt service: The repayment of borrowed money.
- Examples: consumer credit instalment, home loan instalment, loan repayment from friends and family, instalments for purchases (e.g. hire purchase TV).
- Seasonal: Expenses that only occur at certain times of the year.
- Examples: fuel for winter (coal, gas), books for school at the start of the school year, clothes for particular seasons (winter jackets, summer sandals), Christmas presents, holiday costs.
- Life cycle expenses and other planned family events: major events that can be planned in advance.
- Examples: children’s wedding, communion, baptism, university (tuition, materials), large family celebrations.
- Emergencies (contingencies): Unexpected expenses that can put a heavy strain on the budget.
- Examples: flooded flat, broken fridge, illness (extra medication, private visits to doctors), theft, broken TV, sudden car repair.
- Financial penalties: Expenses to be avoided.
- Examples: fines (for driving without a ticket, bad parking), bank charges (for overdrafts, late repayments), interest for late bills.
- Pleasures: Expenses that improve the quality of life but are not essential.
- Examples: going to a café, theatre/cinema/concert ticket, hobby, weekend trip, new book, hairdresser, beautician, new gadgets.