Sunday, July 16, 2006

Expsense Classifications

An expense from your budget is the use of dollars from a given budget category used to obtain associated goods or services. These dollars are also deducted from one of your accounts or detailed in a credit card ledger. Such expenses can be said to fall into one of three classes:

1. Actual dollars expended for specific goods and services. This involves the use of cash, a check, a debit card, or a direct withdrawal (such as online bill pay) from an account. Once the expense is made, the money is immediately gone. Note, in the case of using a check, there may be some float time i.e. the time it takes the receiver to take possession and actually deposit the check. However in these days of electronic transactions, one should assume that once the check is written, the money is no longer available in the account. Hence, one should insure that the dollars needed to cover any given written check are in the account already.

2. A credit card is used to pay for a given expense. In this case, the associated dollar amount should be deducted from the appropriate budget category; however, the balances available in your accounts are not reduced. Instead, a notation is made in an associated Credit Card Ledger. This is one important reason why you should only look at specific budget categories when making expenditure decision, not account balances. Until you actually receive and pay your credit card bill, such credit card expensed dollars must remain available within your account balances. This discipline is required in order to allow you to pay off your entire credit card bill each and every month! I call such credit cards “zero-balance” cards

3. The third type of expense is similar to the first in that the dollars used are immediately removed from an account. The difference lies in the usage of such dollars. Instead of being used to cover a well-defined expense such as the purchase of a tank of gas, or some groceries or to make a loan payment, the money is set aside for use on undocumented expenses. This can be very useful for such things as allowances. You may want to set aside a certain amount of money on a regular basis to cover routine day-to-day expenses such as buying a newspaper, cup of coffee, lunch, a couple of snacks at the office and so forth. Having to record each and every such expense in a ledger, day in and day out can really be a drag and a discouragement to properly maintain your budget. On the other hand, just recording say one expense per week, as cash from your allowance budget should be easy to do. However, a word of caution, such dispensed cash must be kept physically separate from any cash that normally resides in your wallet i.e. Cash Account cash. Dollars within your Cash Account are still in your budget, while dispensed Allowance Cash is no longer in your budget. I call cash maintained outside of your budget system a “physical bougette”. The word “bougette” is the French root word for “budget” and the word “physical” is used to indicate the need to keep such cash physically separate in its own special wallet or change purse.


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