The expense grid is a simple but incredibly powerful tool I’ve developed while examining my expense logging and category systems. While going over my notes on what I now call secondary categories, I realized that all expenses fit into one of four distinct categories, easily defined by a simple grid.
The Expense Grid
The top of the grid shows the two types of cost differentials: Fixed and Variable. Fixed costs are ones that fundamentally do not change over time regardless of payment schedule (mortgage payments, for example). Variable costs are those which change from month to month (like your electric bill).
The side of the grid is divided according to the two types of payments you can expect to make: Necessary and Discretionary. Necessary payments are ones which you have to make regardless of your circumstances or there will be serious repercussions (e.g. utilities and food to eat), while discretionary expenses are once which you have some choice in making (seeing a movie).
Every last one of your expenses will fit into one of the four categories created by combining these four types of expenses. These are the primary categories and can be used in a variety of way to look at your budget.
Now take a look at your secondary and tertiary categories. Do you see where each would fit within the expense grid? Some may be tricky, so I have put together a brief example for you:
Example Categories In The Expense Grid
A lot of people ask about why in this example a phone bill is considered a discretionary expense, but think about it. Do you really have to have a cell phone? If so, do you really have to have a landline? More and more people are giving up one in favor of the other, and the trend seems to be towards cell phones. Costs can be partially in one or the other (for example, the phone bill may have a certain number of minutes at a fixed price, with any time over that amount varying in cost) so be sure to consider this.
Now, how do we use the expense grid? Take a look at Expense Logging Analysis Part Two: Using the Expense Grid.
Tags: Budgeting, discretionary, expense log, fixed, lists, money, necessary, The Expense Grid, tools, variable
