Fixed Versus Variable Expenses

Fixed expenses are easy to track. These are costs you have every month, such as your mortgage or your car payment. Utilities, taxes, groceries, health insurance, car insurance, retirement savings, Jane's ballet class, and John's karate lessons, for example, usually stay the same. Even though these expenses don't change much, you still should keep track of them so you know how much of your income is going towards certain items.

For some of these fixed expenses, financial experts recommend caps on how much you should be spending. Take housing, for instance. Generally, planners recommend that housing use up no more than 25 percent of your pre-tax income.

"Even if a person can get a mortgage to afford more house, they're not going to live within their means if it means their neighbors make more money and they feel they must keep up with them in other ways," says David Bross, a certified financial planner with DS Bross Financial Advisory in Leominster, Mass.

Next, planning for any long-term goals -- such as retirement, college savings, or saving cash to an emergency fund -- should be placed in the "fixed" column. If you wait until the end of the month to fund these goals, you could very well find there's no money left. Instead, pay yourself first.

Johnson says establishing a regular savings plan, such as a 401(k), is the easiest way to start saving for retirement. She says you should try to save 10 percent of your pre-tax income for retirement.

"The national average today is less than 4 percent. If people could work their way up to 10 percent, they would be in good shape," Johnson says.

Ten percent should be your target, but if money is tight and your employer offers a match, you could save fewer of your own dollars. If your boss matches 50 percent of the first 6 percent -- which comes to 3 percent of your pre-tax salary -- you'd only have to pony up 7 percent to reach the 10 percent goal.

Once you've determined your fixed expenses, it's time to track your variable expenses, or those costs that change from month to month. For example, your dining-out bill and your entertainment costs probably vary from month to month. Because these bills change, add up a few months' worth of receipts and figure out an average.

When you have a complete list of fixed expenses and variable expenses, add them up -- then deduct the total from your income to see if you're coming out ahead, or you're behind.