The 4 Most Deadly Expense Categories - How To Conquer These Expenses The first step in developing your budget is to determine your total monthly household income after taxes. If your income varies each month, use the minimum you realistically expect to bring home. A conservative estimate, in this case, can prevent overspending later.
Now determine how you are spending money by separating expenses into four categories. For this to be effective, you must be honest about your spending habits. No fudging the facts here.
Level 1 expenses
Begin by listing your essential items: shelter, groceries, utilities, and gasoline. These are your Level 1 expenses.
Level 2 expenses
Next, list and total your monthly payment obligations, such as car payments, credit cards, and other loans. These are your Level 2 expenses.
Level 3 expenses
Level 3 targets your non-monthly expenses – money that can be easy to lose track of.
This includes insurance, car repairs, clothing and anything else that you pay for on an irregular basis.
By saving for these items ahead of time, they won’t cause minor financial emergencies. For example, if you want to spend $800 on Christmas, about average for U.S. families, you will need to save $67 a month starting in January.
Level 4 expenses
Level 4 expenses are the “nice to have.” Restaurant meals, lattés, beer, vacations and trips to the movie theater can all fall into this group.
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