Estimating your expenses

An Expense Estimate spreadsheet is a budget of expenses by category for an average month.

The best way to make an Expense Estimate is to clear off the kitchen table and take your bills, receipts and invoices for an entire year, separate them by company, and put them in order by date. Look through your checkbook and bank statements to find expenses that did not show up in your bills and invoices. Try to guess how much you spend in cash on snacks, knick knacks, and miscellaneous fluff. Honesty is the best policy here, your goal is to learn from mistakes, so don't hide from the truth.

Split up expenses into budget categories as best you can. You can create your own categories. Try to estimate an average expense per month. Sometimes this is not possible. For example, heating bills are higher in the winter, while electric bills are higher in the summer. Make notes of expenses that vary by time of year. Some expenses occur once or twice a year, such as insurance or property taxes. Use a spreadsheet to log expenses that occur once or twice a year.

As you go through your expenses, try to categorize them into the following Expense types:

• Regular Expenses - Regular, monthly, predictable expenses that are for items that you cannot do without, such as house payments and utility payments. I suggest that you include a monthly payment to your investment fund as a regular payment.
• Debt Service - Payments toward loans which are for items purchased prior to the current month. Home mortgage, auto loan and credit card debt falls into this category, however if you pay off your credit card the same month that the purchases are made, the expenses would fall under the appropriate category for the purchase.
• Annual Expenses - Regular, predictable expenses that occur every year or several times a year. These are items which are paid once or twice a year, and which you cannot do without, such as property taxes, condominium fees and insurance.
• Variable Expenses - Expenses which are somewhat unpredictable, and discretionary expenses, such as food, entertainment and clothing.
• Emergency Expenses - Unforeseen expenses which cannot be avoided, such as auto repairs or health care costs.
• Strategic Expenses - Planned purchases, which are larger than the usual discretionary expense, such as home improvements and purchase of a vehicle.

So there are a few different things going on here, first you are looking at your receipts and invoices, and estimating an average monthly expense for each company that sends you a bill. Then you are identifying which budget category the expense belongs to, such as House Payment, Telephone, etc. Finally you are listing each category as one of the six expense types above.

The reason you are going through this difficult exercise is that you are going to be setting up a cash flow sheet that is going to regulate how much money you will spend on each of the expense types. If your estimates are accurate, you will find it far easier to follow the cash flow plan.