How Do We Prepare For The Next Recession?

Question: My husband and I have read many articles by you and other experts that predict a recession is coming soon. We’re very scared about this, as we barely survived the last recession. We still haven’t paid off all the debts we incurred during that time period.

My husband read this article on the Fox Business website and wants to invest in silver stocks. He wants to divert the $50 a month we put into an IRA we have for retirement. This doesn’t feel right, but I can’t explain why it feels wrong. What do you think?

— Regina in Texas

Howard Dvorkin CPA answers…

When I originally wrote we’ll suffer another recession during President Trump’s first four years, I was worried. I wanted Americans like you, Regina, to know what might be coming — and get ready for it. However, I didn’t want to cause panic or even angst.

I have a formula: Preparation plus time equals inner peace.

So you can indeed prep for the next recession, but you don’t need to take hasty risks like investing in precious metals. Only a few months ago, I told another husband not to buy gold on his credit card. Now I’m telling your husband not to stop saving for retirement to buy silver.

What I wrote about gold also applies to silver or any metal: Prices fluctuate wildly, they’re impossible to predict, and you can lose your entire investment if you’re not careful.

Even worse, you seem to imply, Regina, that you still have credit card debt that you’ve been carrying since the last recession. Your first priority should be paying that off. If your husband is unconvinced, tell him to think about it this way…

  • Silver has a 16 percent annual rate of return, although that can fly in either direction at any given time. You might make 200 percent, or you might lose 100 percent.
  • The average interest rate on a credit card for someone with good credit is around 15 percent. It balloons to 21 percent for those with fair credit. It sounds like you might be somewhere in the middle, Regina.

…so paying off your credit cards will put just as much money in your pocket as investing in silver, and without the risk.

Investing in the stock market is something you should only do when you have money you don’t desperately need. Even then, it’s folly to buy individual stocks or even stock funds that are invested so narrowly in industries you and your husband know nothing about.

If you really want to prepare for the next recession, has a special report that shows how Americans recession-proof their finances. Unlike that Fox Business story your husband showed you, Regina — which ended with a pitch to separate you from your money — the report is free.

Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Why Even Bother with New Year’s Resolutions to Pay Down Debt?

Question: We’re not even six weeks into 2017 and my boyfriend has already blown his New Year’s resolution to stop running up his credit cards and actually start paying them down.

He was doing fine until the Super Bowl last weekend. Then he not only spent $200 on buying drinks for his friends (because he says his team won, and it’s a tradition) but he also spent another $120 on football jerseys and hats, even though he has a lot of them already. He wears them when we go out on dates, and it’s annoying.

Meanwhile, I’m sticking to my New Year’s resolution to pay extra on my car loan so it’ll be paid off a year early, and I’m not buying any more sexy boots. (I admit I’m addicted to boots, but I also admit I have a shelf full and don’t need any more this year.)

I’m wondering if this relationship has a future if my boyfriend can’t even make it two months on his promise. What do you think?

— Paula in South Carolina

Howard Dvorkin CPA answers…

I’ve never been keen on New Year’s resolutions, Paula. Last month, I compared them to dental floss. My main objection is that a resolution is like a diet, which we’re all likely to give up on at some point.

Just like you should make lifestyle changes instead of hop on the latest diet fad, financial resolutions don’t help as much as small, permanent changes in your financial planning.

Your boyfriend has essentially cheated on his diet — but he hasn’t cheated on your relationship. Few Americans take their New Year’s resolutions seriously. As I’ve mentioned before, a mere 8 percent of us keep them.

It also turns out that women make more resolutions about finances than men do. In fact, they make more resolutions in general. A recent Harris Poll asked men and women what kind of New Year’s resolutions they’ve made this year…

  • Eat healthier (33 percent of women vs. 23 of men)
  • Save more money (29 percent vs. 21 percent)
  • Lose weight (29 percent vs. 18 percent)
  • Pay down debt (19 percent vs. 14 percent)

As you can see, the top four resolutions split neatly between food and money. As you can also see, there’s no way that many Americans are keeping that many resolutions.

So I wouldn’t harshly judge your boyfriend for slipping on Super Sunday. Ask yourself how tempted you might be if you spied a once-a-year sale on boots!

Instead, if you really want to judge your boyfriend’s commitment to both a loving and financial relationship, sit down together and discuss the basics of personal finance and money management.

If you can agree on these principles, I still can’t guarantee your relationship will last. However, if you don’t agree, I can predict (based on more than two decades of counseling couples about money) that your relationship will suffer or possibly even fail.

Bottom line: This is about being resolute about money every day, not making a New Year’s resolution.


Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: How Can I Save My Kids?

Question: I have two young girls, ages 3 and 5. My husband and I follow your advice, as well as that from other bloggers like Money Talks News and Dollar Stretcher. (I think those are our three favorites.)

But here’s the thing: We both grew up in families that declared bankruptcy a couple of times and still run up big bills on their credit cards, buying stupid things they can’t afford. I don’t want my daughters growing up to be like that. But what can I do?

When I search online for “how to teach your kids about money,” lots of advice comes up. But really, my kids aren’t going to do that stuff. Dave Ramsey said to “use a clear jar to save,” but I want something that’s not a gimmick.

What can I do, Howard? Please give me something REAL.

— Megan in Iowa

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastLast month, I was interviewed on just this topic by the National Financial Educators Council, a wonderful organization. Here’s part of what I said…

I’ve never understood why schools teach economics but not personal finance. Or why we teach our children geometry but not compound interest. High schoolers learn about the broad strokes of capitalism versus communism, but they don’t know the basics of APR or what ‘debt-to-income ratio’ means.

If our schools aren’t going to teach the crucial skill of money management, then it’s up to enlightened parents like you, Megan. While you can do many little things to reinforce the value of money, one of the biggest things you can do is take your daughters to Junior Achievement when they’re old enough.

I’m a big fan of Junior Achievement — so much so I donate both my time and my money to its amazing programs. What does JA do? The nonprofit teaches by letting children learn by doing, starting as early as the third grade. When it comes to teaching kids about money, it’s one of the most important resources out there.

They can start their own mock businesses, learn financial literacy by visiting a virtual community, and even shadow successful business people on their jobs. Here’s how to find a JA near you.


Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

What’s So Bad About Playing Powerball?

Question: I buy a Powerball ticket each week, and my boyfriend always makes fun of me. He says I might as well take my $2 to $3 (sometimes I pay the extra dollar for another play) and burn it in he fireplace. He also says I have better odds of becoming president after giving birth to triplets.

I bet he won’t be saying that if I win, and besides, one of his micro-brewed beers costs $5. Anyway, we’re always arguing about this, and now that Powerball is $1.5 billion, I spent $10 and he’s freaking out. What can I tell him to shut him up?

— Ana Lisa in Connecticut

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fast

Your boyfriend is right. You’re not going to win.

There are all sorts of examples of the long odds you face in tonight’s Powerball drawing — like being struck by lightning — but I think my favorite is from Wired. The magazine simply declared you have “barely better odds than having your name randomly pulled from a hat filled with the names of everyone in the United States.”

I’m a CPA and a financial counselor, not a therapist, but I will say this: It’s not worth ripping apart your relationship over lottery odds. However, I’ve been doing this long enough to know that fighting over lottery tickets is usually a sign of deeper financial discord.

I could certainly point out that the $2 to $3 you spend per week adds up to more than $100 a year. That’s at least one very nice dinner with your boyfriend. In more boring but responsible terms, that’s $100 toward paying off your credit cards or saving for retirement.

Instead, let me hypothesize that you are your boyfriend have different views about money. Not just about Powerball, but about clothes, cars, tech, and even something as basic as budgeting.

How can I make such a bold claim? I’ve seen couples debate the lottery. I’ve seen precisely the same arguments you and your boyfriend are having. Let me break it down like this…

Powerball isn’t entertainment

If your boyfriend buys craft beer and you buy Powerball tickets, those are actually two very different things. You’re buying a ticket to win, against all odds, a lot of money. Your boyfriend is buying a beer because he likes the taste of it. He’s enjoying something now, while you’re simply hoping to reap a reward later.

Powerball is gambling

That might seem obvious, but many Powerball players see themselves very differently than those sitting in a casino. Yet their goal is the same: Spend money now to make easy money later. While some people say gambling is their form of entertainment, the fact is: It’s not entertaining if they don’t win.

Powerball adds up

The cost of Powerball is more than the $2 to $3 you spend a week. It’s the mindset of a get-rich-quick fix to all your financial problems. I’m not saying that daydreams are ridiculous — even CPAs have imaginations — but if you play Powerball because you seriously think you’re going to win, I wonder if you follow a budget, understand your credit score, or know what you need to do to pay off your debts.

Bottom line, Ana Lisa: If your relationship can’t withstand a couple of dollars a week, there are deeper issues, probably financial. So if you don’t win tonight (and really, you won’t) I suggest you and your boyfriend sit down with a craft beer and review your finances and your attitudes about spending and saving.


Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Ask The Expert: Who Needs A Stinkin’ Budget?

Question: My son is home from college for the winter break, and he laughed at me when I said my New Year’s resolution was to budget my money better — and he should, too. Instead, he showed me this article that said a personal budget isn’t “nearly as essential as we might think.”

I don’t really believe the article, but I don’t know how to convince him it’s wrong. This is important because his spending habits are very poor. Do you have any idea what I can tell him?

— Sandy in Michigan

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastThe article you mention was from last summer. I’ve spent the rest of this year explaining why it’s wrong.

In June, the online magazine Slate posted a provocative article called Toss Your Budget. The premise is simple: “The ability to make and stick to a financial budget defies the realities of most people’s lives. Budgets assume a level of consistency in our finances that doesn’t exist.”

These two claims are undeniably true. Following a budget can be difficult, and no budget can predict emergencies that will cost money.

However, concluding, “Let’s forget the whole thing!” is like saying, “Why eat healthy when I’m just going to gorge myself over the winter holidays?”

The Slate article certainly pointed to a serious problem: Most people budget all wrong.

For starters, they’re too specific with their numbers and too broad with their categories. What’s that mean? explains it in plain English in our Budgeting Don’ts section. If you and your son peruse that page, you’ll see that budgeting doesn’t have to be as intense as a college course.

If your son is like most college students, he’s probably obsessed with the latest tech. In that case, he can let the computer do his budgeting for him. offers PowerWallet for free. It offers a suite of fancy online money management tools, but it’s also easy enough for anyone to use. (Just don’t tell him that!)

What you can tell him is that if he signs up for PowerWallet now, he can possibly win $2,500. We call it the Get out of Debt Sweepstakes. If I know college kids, this is the most compelling argument you can make.


Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

How to Teach Kids About Money

Important money lessons and milestones you can use to teach kids finance.

The way adults behave with money often stems from how they were taught to handle finances as a child. If their parents constantly spent money they didn’t have and were continually in financial trouble, the children wound up with similar bad money habits, according to a T. Rowe Price Study. This is especially true if parents never teach their children financial responsibility in at least some capacity. That’s why teaching kids about money should begin at an early age. It’s important to show children, even as young as 2 years old, that things cost money and there is a value in the things you buy.

The latter is especially important in an age where “toys” can be considered tablets and smartphones that cost much more than a $2 trinket. It’s vital for a child to understand that even experiences can cost something; otherwise, as they get older, they will feel entitled to these experiences and goods. The older a child gets, the harder it will be to change their mindset if they haven’t been taught it in the past.

Financial Literacy for Kids

It’s important to start money lessons for children early. But you can start small. You don’t have to go straight to addition and subtraction, or even costs. Below we’ll highlight several topics to teach your children at certain ages. This is not to say that you can’t go beyond the scope. Just keep in mind that some concepts can’t and won’t be grasped if you try to teach them too young.

Step 1: Introduce your kids to basic money concepts at 2-5 Years Old

Now is the best time to impart the basics, like the concept of money. It can start small by teaching children the value of things and experiences. When you go to the store or a restaurant, take them and have them pay for it using your cash or credit card. This shows them that there is an exchange of “money” for goods or services. (Children at this age don’t understand the concept of a credit card or debit card, so when teaching lessons, it can help to have some cash on hand.)

When it comes to experiences, explain to them that the trip to Disney or the plane ride costs money and that it is expensive to travel to new places. It’s also a good idea to begin imparting the idea of charity and those with less. Explain that when they get something special or something of value, that they are lucky to have gotten it because there are others out there who don’t have the access to good food or vacations like they might.

Once your child is beyond the stage of putting things in their mouth, around age 3, you can start introducing actual coins and dollar bills. Play money is good for this, too. Again, start small. They don’t understand the difference between the value of a penny and a quarter, just that it is all “money.”

The 3-piggy banking system for kids

Age 3 is also a great time to introduce a piggy bank. Some parents break it down even further and set up a three-piggy bank system:

  1. One little piggy is for saving
  2. The second is for spending
  3. And the last one is for charity.

This can be altered and set up for just saving and charitable giving as well. Begin the concept of the piggy bank by offering them change for a chore they did well or the change from a trip to the grocery store if they were well-behaved. Have them count the number of coins and separate them by the way they look. This will be helpful when teaching them the different values of the coins.

Around age 5 you can begin to teach them about the individual coins and what they are worth. Make sure that each lesson is fun and not made to be overly complicated or daunting. This could lead to negative feelings about money and potentially poor money habits in the future.

Step 2: Start teaching kids how to manage money at 6-10 years old

This is where the real lessons on how to manage money come into play. According to an article by Beth Koblinger, a personal finance expert for young people, money habits are often set by age 7.

If you haven’t yet, take your child to a local bank branch and open a checking or savings account for them. Many banks and credit unions offer accounts with no fees for young children. Unfortunately, most banks no longer offer coin counting machines that children can use to add up their piggy bank savings. You can work with them at home counting out change to fill up coin wrappers and bring those into the bank. Or you can check in your local area, since some grocery stores or other local establishments may have coin counters.

This is also the time to do some research on allowances and working that into the mix. Set either a single weekly amount or separate amounts for individual chores that are distributed at the end of the week. Explain to your child that just as in adulthood, work equals pay. If they don’t do their at-home “jobs,” they cannot get paid.

If they want to buy something at the store, explain to them they can use some of what they’ve saved (or some of what is in their “spend” piggy bank) to buy the item in question. Not having enough is a very important lesson in teaching financing to kids. It reinforces the idea that things have value and that you must save sometimes to get the things you want. But if they want the item and the allowance won’t cut it, it might be time to teach your kid ways to make money outside of allowance.

How to Make Money as a Kid

One lesson that you can start around age 6-10 is the concept of work, outside of chores, to make money. This lesson can extend well into high school and beyond. Ways to make money for kids vary from lemonade stands, helping neighbors clean their gutters or cars and even selling items like toys and books they may no longer want or need.

Years ago, there was a computer game that helped understand the concept of money with a lemonade stand. It helped children understand the cost of each item (lemons, sugar, ice, cups) and how much to charge based on the amount of ingredients you used and the weather. Similar apps exist today, but don’t offer the real-life lesson of getting out there to earn some real extra money.

Cash is king at this age because it is something tangible that can exemplify the exchange of money for goods. It can also reinforce basic math skills of addition and subtraction, by making sure you pay with the correct amount and that you receive correct change. This can be hard in this day and age because so many things are paid for with debit and credit cards, as well as online. Balancing a checkbook and other financial techniques are antiquated measures. But it might be prudent to start teaching your child the basics of a simple accounting spreadsheet or budget so that they can begin to grasp financial concepts more firmly.

Step 3: Reinforce health money habits at ages 11-14

This is really the age to start reinforcing the money habits you taught your children earlier on. Make sure chores are done and allowances are earned. Have them start using their money to buy the things they want instead of you making these purchases. This is one of the critical points of finance for kids, making sure they understand that the things they want cost something.

Expand on the idea of earning money outside the home with babysitting, washing neighbors’ cars or cleaning their yards, etc. Making more money is a perfect opportunity to discuss again the idea of saving, spending and helping others through charitable giving.

It’s also important at this time to talk about and explore potential volunteering opportunities for your children. Allow them to experience a world outside their walls and show them the importance of giving back to those less fortunate.

Step 4: Start introducing financing, credit and income earning at age 15-18

Teaching kids about money; lesson should be more advanced for teensWill your child drive or do you live in a city that has options other than cars for transportation? It makes things easier if you live in a place like New York City where there are myriad forms of public transportation for your kids to get around.

Children often think of getting a car when they turn 16 or 17, but most families can’t afford that kind of expense. However, if your child has saved up, there might be some opportunity to get some kind of reliable used car. You can potentially consider offering to split the cost or pay for insurance.

Before you get a car for your child, make sure they understand the costs involved. There’s the initial purchase of the car, sure, but there’s also insurance, the tag/registration, gas, oil changes and other scheduled maintenance, roadside assistance and more. Make a list for your kid and sit down with them to go over the costs of car ownership.

Once they see the costs involved, it might be time to get a part-time job at a local store or restaurant. This comes with its own set of issues though. Many articles are quick to point out that as school has become more rigorous and in some cases extended into summer; children don’t have time to work for extra cash. Some establishments also look for more qualified workers as a result of minimum wage hikes, leaving high schoolers high and dry.

Make sure to talk to your children about the balance of school and work and free time. Each of these offers its own rewards when it comes to learning about the real world and teach kids finance in a different way.

Step 5: Start talking early about how to afford college

Age 15-18 is also the time to discuss college or what your child plans on doing after high school. If your child isn’t necessarily the college type, it may be worth looking into trade schools for a career outside what a bachelor’s degree can offer. There are plenty of lucrative career paths including plumbing, being an electrician and even specialty areas, such as welding.

If your child does plan on going to college, look at the options and discuss costs. Private and out-of-state colleges are much more expensive than in-state public institutions. Look at scholarships, grants and other options to help defray costs. It’s also a great time to discuss student loans and how they can impact your life after college.

Make sure to include heavy costs areas, such as housing and food, in your child’s college budget as well. Allowing your child to be a part of this discussion will help them make a smart decision that can affect the rest of their lives.

Financial literacy is the gift that keeps on giving!

No one ever says it’s easy raising another person from infancy to adulthood, but it’s a job that must be taken seriously. The importance of teaching kids about money is paramount to making sure they can survive on their own once they are out in the world. These training tips should help to guide you along the way to ensure your child understands not only the value of money but the importance of managing it properly to be successful.

Just remember, giving in to your children’s demands for things without ever making them work for them or earn does them a disservice. If you teach them important lessons, such as the value of earning your money and saving to buy what you want, you set them up for succcess in the future.

Who is Right About Budgeting Our Money, My Wife Or Myself?

Question: My wife and I fight, or shall I say disagree, all the time about spending and a budget. She has one opinion and I have another. She says we should not spend more than 25 percent of our income on housing but I say 33 percent is alright. Who is right?


Steve Rhode answers…

Steve Rhode on how to get out of debt fast

Jimmy: The reality is you are both wrong and right at the same time.

For years I’ve watched so many personal finance experts write advice about how much people should spend in each category of their lives. I have also watched people fret and worry if they run over those limits.

The reality is that the experts don’t know and just made those rules up. Frankly, they just pulled them out of their butt.

At the end of the day the it isn’t how much you spend for cell phones, cable television, cars or rent. They bottom line is whether you can afford to live within your income, save money, invest some, and enjoy life.

If you want to spend 50 percent on housing and make cuts someplace else, go for it. If you want to spend 20 percent of your take-home pay on your mortgage and go out to eat every night, go for it. I don’t care and it just doesn’t matter.

Most budgets people make are no more than just a page of lies. Unless you are tracking your spending and know how you actually spent your money, you are just guessing how you want to spend your money in the future. Inevitably, when you don’t hit those fixed targets, it creates agitation.

Rather than guess what your financial future will be, develop a spending plan and take a look at how you actually spent in the past month. Once you have reviewed your actual spending, you and your wife can make some educated and informed decisions about how you want to change things for the month ahead. You can learn how to develop an awesome spending plan by downloading my free book, “Eliminate Your Debt Like a Pro” and start reading at page 81.

Now I suspect that your relationship is much like others in that one of you is a saver and one is a spender. Each of us have our own money personality.

Have you ever heard that old adage opposites attract? Well it applies to people with different money personalities as well. Typically, conflicts really flare up between spenders and savers. Spenders feel micromanaged and savers feel insecure without more tucked away.

A healthy financial life is more about balance than about sticking to an arbitrary limit. What I’d wish most for you and your wife is to come to an agreement about what you’d like to save and invest each month and then just enjoy the heck out of the money leftover.

Steve Rhode is the Get Out of Debt Guy. He’s been helping people with personal finance troubles through advice and education since 1994.

Ask The Expert: Can You Explain “Debt-To-Income Ratio” in Plain English?

Question: I’ll graduate in a few weeks with a Communications degree, so I’m not stupid. But when I try to figure out how to live in the Real World on a budget, most websites are poorly written. I just can’t figure them out.

Here’s an example. I’m trying to learn about “debt-to-income ratio,” and Wikipedia isn’t much help in a practical sense. I went to the federal government’s new consumer protection website, and it’s only marginally better.

What I really want to know is, What should I DO about my DTI?

— William in Arizona

Howard Dvorkin CPA answers…

Just last month, I answered another reader’s question and mentioned this topic. I declared, “This is the single most important personal statistic you can know.”

So it’s worth some more discussion.

Last month, I defined the term like this: “DTI is simply how much of your gross income is needed to pay your debts. Ideally, you want it to be as low as possible.”

How low? The federal government’s Consumer Financial Protection Bureau (one of the websites you cited) says anything above 43 percent could jeopardize your plans for buying a house, because you can’t get a qualified mortgage above that amount.

In my experience counseling debt-riddled Americans, anything over 30 percent means you probably aren’t saving enough money — whether it’s for retirement, your children’s college, or a new house.

You also asked what you “should do about your DTI.” First, you need to figure it out, and the easiest way to do that is with’s DTI calculator. Just plug in some numbers, and you’ll get the result.

Next, if your DTI is between 30 and 40, you need to monitor your spending in a tool that speaks, as you said above, “plain English.” It should also be free, so I suggest Power Wallet. It’s what we call a personal finance manager. Basically, it’s an online budgeting tool that shows you exactly what you’re spending in simple and elegant graphs and charts, which you can change at the click of a mouse.

If your DTI is 40 to 50, however, I suggest you make a free call for a plain English conversation with a certified credit counselor. They’ll give you a free debt analysis, and they’ll tell you if you qualify for any debt-relief programs. The number is 800-810-0989. Good luck, William. If you want, tell me what your DTI ratio is. I’m curious!


Have a debt question?

Email your question to and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

How to Create a Budget and Stick to it

How to make budgeting a healthy financial habit you stick to.

Create a budget

We get it. In the past, budgeting was often time consuming, difficult, and a big hassle. But with the technology available now, that “big hassle” has become infinitely easier because digital platforms do all the hard stuff for you.

Still, even though you have a program to do the math, you need to know some basics to really build the effective budget you need. You can prioritize your obligations and expenses, and make real actionable plans to reach your financial goals. You can have a budget that really offers a good foundation for financial success.

Fact: Housing, transportation, food, insurance, and healthcare are the 5 largest expenses in the average budget.

Defining the elements of a budget

A budget always contains the following:

  • Income
  • Fixed expenses
  • Flexible expenses
  • Discretionary expenses

Income is obvious – it’s everything you have coming in. That includes things like wages from jobs, received alimony or child support, VA or other benefits, court settlement payouts.

Expenses are divided into three categories based on how they get paid and whether it’s a want or a need:

  • Fixed expenses are needs that have a set cost that stays the same from month to month
  • Flexible expenses are also needs, but they don’t have a set monthly cost
  • Discretionary expenses are your wants

So what do you get out of defining your expenses? You can prioritize and plan effectively. You can also easily make cuts when you need to streamline your budget when you need to pay off debt or save up for something big.

Types of expenses versus budget categories

Now it’s important to recognize that “types of expenses” are different from “categories” that you assign to transactions. Transaction categories are more specific, while expense types are broad. And you need to define both to have an effective budget.

Think of your budget like an office building. Types of expenses would be the different floors of the building, while transaction categories are the rooms. So just like there can be a meeting room on every floor of an office, your housing costs can be spread out between all three types of expenses.

  • Mortgage payments, HOA and insurance are all fixed expenses
  • Electric bills, water bills and other utilities are flexible expenses
  • Renovation and decorating expenses would be discretionary, because there isn’t a real, immediate need to have them done

Categorizing your transactions

When you start using a budgeting platform, it’s going to ask you to categorize your expenses. These programs learn from what you do, so you have to teach it how you think your spending should be divided.

Not everyone categorizes transactions the same way. So one person may put all of their food costs into one big category, while someone else would split up groceries and dining out. In general though, the more you categorize, the easier it is to structure your financial life.

Our experts recommend you try to categorize in a way that helps you split your expenses up. So using the housing example, mortgage payments should be a category, utility bills would be another category, and then home renovations should be another. That way, if you need to reduce your overall housing costs, you know where to cut.

Estimating cost on flexible and discretionary expenses

Fixed expenses are the only thing with a set cost every month, so how do you set the monthly cost for the other two types of expenses?

You take a three-month average.

Look back at the past three months of transactions and take an average in each category. This will give you a good baseline of where to set a monthly spending limit for that category. Setting monthly spending limits is important because it keeps you from overspending.

The good news: your platform does the calculating for you. Just categorize your transactions and the program tells you how much you’ve been spending.

Assessing your budget and making adjustments

Once you’ve done the initial legwork of entering your accounts and categorizing transactions on your budget platform, you can let your budget work. Since it’s a digital platform that constantly updates itself after every transaction you make, you just have to log on and see your progress.

Here are some tips for using your budget daily:

  • Watch your spending limits versus your actual spending. If it’s mid-month and you’re already reaching a limit in a certain category, slow down.
  • On the other hand, if you just can’t seem to stay on-budget in a spending category, you may need to adjust the spending limit. Just remember when you do that your total expenses need to be less than your income. So if you increase in one category, you may need to pull back in something else.
  • Make saving money into an expense. It should actually be a fixed expense so you “pay yourself” appropriately every month.

Having trouble getting organized? Let Tiller do all the work for you! Building a budget has never been easier with Tiller spreadsheets!

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