Last week we discussed income, which is basically increase, usually financial. Expense, on the other hand, is decrease. While income increases your resources, expenses decrease your income.
There are a few ways to look at expenses. One is to look at them as passive versus active, like income. Active Expenses are expenses where you actually do the work to decide to purchase. Active expenses have some amount of thought that goes into them, and so they are usually of more benefit.
Passive Expenses are expenses that you set up the purchase once and then continually pay for them. This would be things like cell phones, cable TV, magazine subscriptions, insurances and utilities like water, electric and gas. These expenses are a continual drain on your resources, without much thought given to how much they are needed. In comparison to active expenses, passive expenses need to be scrutinized on a regular basis to ensure that the value you are getting is still worth the money.
You can break down passive expenses into fixed and variable. Fixed expenses tend to be things like cable, cell phone, etc. They don't vary much (except for things like overage charges) and are great for budgeting because you can plan on them. Variable expenses can be a bit trickier. These are often utilities, like electric, gas and water. These vary, usually seasonally, and can wreak havoc depending on the weather. You can somewhat compensate for the variance by determining what the yearly average is, adding some for rate hikes and paying the higher of your balance or the average. If you reevaluate every six months or so the average and you add some to account for price hikes, you'll have turned a variable expense into a nearly fixed expense.
A second way you can break down passive expenses is into how often it is paid. Utilities, cell phones and cable bills usually come monthly (as does most income). Expenses like insurances and taxes can be paid less often, usually for a discount. Or, said another way, you can pay some expenses monthly for a fee. If you set up a separate bank account to store off the monthly amount for these (kind of your own escrow) expenses, you can reduce your overall expenses by eliminating the fee for monthly payments.
Another view of expenses in general is small versus large. Small expenses are the expenses that most people don't even think about. A dollar here a few bucks there. Small expenses are not thought to be a big deal. However, like passive expenses, there is little thought put into the value received. Each expenses seems like no big deal. However, when added up, these could be the small leak that are sinking your financial ship.
Large Expenses can also sink your ship. Large expenses are usually not bought on impulse. There is some thought put in as to the perceived value. However the financial drain is often underestimated, and often large expenses are turned into passive expenses though financing (although small expenses can be to with credit cards that are not paid off monthly). This would be the houses, cars, boats, televisions, furniture, etc. You may need some of these large expenses but the problem is that you do not deal with expenses this large on a regular basis. This leads many to buy more or bigger than they really should. They'll buy the perfect house because the bank says they qualify. After a credit check the dealer tells them the payments, which seem like minor additions to their budgets. The new flat big screen televisions are on huge discount right now, so they run out and get one (or maybe two since its such a great deal). Then we come to the next categorization of expenses.
The next view of expenses would be Expected Expenses versus Unexpected Expenses. It seems that it never fails that once you make that big purchase, an Unexpected Expense comes along and puts you even further in the hole. It could be that you had a income tax refund that you used to buy that big screen television, and then the air conditioner stops working or your car breaks down. Planning for unexpected expenses is a lost art. I've heard it recommended that we have anywhere from three months to a years worth of expected expenses stashed away. This gives us the freedom and peace of mind that we don't have to worry about these unforeseen expenses sinking our financial ship.