A major step in achieving financial freedom is cutting costs and managing expenses. It’s important to understand how an expense differs from debt.
I define debt as money you already owe someone else. An expense, on the other hand, is money that you will pay someone else in the future. This is a crucial distinction to understand. To give you an example, let’s take paying for your monthly electricity bill. When you receive your bill, it usually comes before the due date. That makes your electricity bill an EXPENSE (for now) because you will pay it by the due date (let’s say the 15th). Now, if the 16th of the month comes and you haven’t paid that bill, it becomes DEBT because you now owe it to the electric company.
A good way to think of it is this:
- Expenses get paid forward
- Debt gets paid backward
Because of this, I don’t classify expenses as good or bad. Instead, I like to think of expenses as necessary or unnecessary.
Necessary Expenses – this is money for things that are an absolute must. Without these things, you will find it hard to maintain your quality of life
Unnecessary Expenses – these are things that you could temporarily eliminate from your life in order to get your financial house in order. Now it’s important to point out that unnecessary expenses are not a bad thing, because we all want a little indulgence
every now and then. But while it would be nice to have them, when and if the time comes for you to cut back or trim some things, this is where you’d start looking to reduce.
So what are some necessary vs. unnecessary expenses? Well, for everyone there are the basic necessities that translate into necessary expenses: food, shelter and transportation. This means that necessary expenses would be things like: groceries, rent/mortgage payment, utilities and car payment/bus fare. Personally, I also believe that Saving and Giving are necessary expenses.
Initially, one would assume that anything else not mentioned above would be an unnecessary expense, but that’s not necessarily so. The rest is going to depend on where you are financially. For example, for someone who’s struggling to make ends meet, eating out at restaurants is an unnecessary expense, while for someone who’s doing really well and maybe time doesn’t allow them to make dinner at home, this same activity may be necessary.
When you are planning on spending money, a great way to determine if an expense is necessary or not is to ask your self this question: “Is this absolutely positively vital to my survival and/or lifestyle?” If yes, then you know it’s a necessary expense for you, if no, then you know it’s unnecessary.
What you’ll find is that as your financial situation improves, you’ll notice that some expenses that used to be unnecessary may move over to become necessary. A great example is a trip to Disney World. I know of woman who wanted to take her children there and it just wasn’t feasible to do while she was working to clean up her finances. But once she eliminated her debt and got a grip on managing her expenses, that trip became necessary as a reward for the sacrifice and she began looking at it as a necessary expense and began putting money away and planning for it in order to have it paid for in full when the time came (so it never had the chance to become DEBT!)
So what are we striving for? Well, the ultimate goal is to curtail unnecessary expenses and to be in a position where you are thoroughly prepared for necessary expenses meaning you can pay them off in full when the time comes!
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Brandon and Gina Wilkins are financial coaches and co-founders of Financial Freedom Builders LLC. Mr. Wilkins is also the author of the financial classic, Getting Rich is Simple...But It Ain't Easy! They are available for coaching, workshops and seminars designed to help you take control of your finances.
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