Simply put, your variable costs may include your electricity bills, car maintenance costs, medical expenses, food expenses, just to mention a few. How do you budget for them? These bills may or may not come every month plus there costs fluctuate on a regular basis. How do you go about deciding how much to budget for each month?
There are two approaches to this.
Averages Approach
First, you can look at your financial records over the past 12 months, add up the total of each variable cost and divide the total by 12. You will arrive at the mean or average amount you have spent on each variable cost over the past 12 months. You will then budget using the average figure you got.
This approach has its pros and cons. There are months when your variable costs will be below the average amount you in your budget, meaning you will have some extra cash left. This will call some degree of self-discipline. Instead of wastefully spending this balance, you could save it for a rainy day or allocate it to your next budget cycle.
Then there are months when your variable costs are more than the average amount you had allocated in your budget. It you are in a tight financial situation, it will destabilize your financial position as you will be forced to either cut down on certain expenses or deduct from your savings so that you can cater for costs you didn’t adequately budget for.
Highest Amount Approach
The second approach entails analyzing your variable costs over the past 12 months; identify the highest amount you have ever spent on each variable expense, then budget using the highest amount. Based on the fact that your budget always anticipates high expenses, and at most times your variable costs will be below the amount you budgeted for, you’ll often have extra money left over at the end of the month. You could save the extra money or use it to pay off debts.
In comparison with the first approach, budgeting using the highest amount you’ve ever spent over the past 12 months always keeps you prepared for any eventualities and at most times you’ll have money left in your budget, that’s if you stuck to your budget.
Like Miriam Caldwell, writer for families.com puts it, variable expenses can be tricky items to include in your budget, but you can plan around them