Is This a Good or a Bad Expense?
Life, both business and personal, is full of expenses. But all expenses are not equal. Some can help you, and some can hurt you.
One way to look at your expenses is to sort them between 4 categories: destructive, productive, lifestyle and protective.
Once you understand this concept, you can eliminate expenses that are damaging or unnecessary, and focus on those that are helpful or saving you money. Let’s examine each type and discuss some examples.
Destructive expenses include purchases and investments that have a negative effect on your finances. They can lead to debt. They are obviously not beneficial.
Some of the most obvious are overdraft, overage and late fees. These can easily be avoided by budgeting, scheduling payments and spending within your means.
Another example is subscriptions you don’t need, magazines you don’t read and (gym) memberships you don’t use.
It’s time to cut the cord and save money each month.
On a larger scale, if your mortgage payment is over 50% of your income, it would be considered a destructive expense because you will always be playing catch up with your budget (housing costs should typically be under 30% of your income).
Spending money on items or property that you cannot offload quickly means you have to sit on that choice and possibly lose another opportunity.
All of these tarnish your financial picture. They should be reassessed periodically and eliminated whenever possible.
Productive expenses increase or strengthen your financial picture. They are related to your productivity or how you make money.
Improvements to your practice, including renovations and equipment, can benefit the business. They can help you become more efficient and create more revenue.
Marketing can be a very productive expense, as long as it brings new or more qualified clients through your doors.
Placing ads to attract the right employees for the right position is critical.
Stellar team members have two main benefits:
- you can delegate to them and focus on what you’re good at, what you enjoy doing, or what only you can do.
- they can work in areas you can’t or shouldn’t focus on: accounting, taxes, inventory, cleaning etc.
Expanding your skillset is another great example of a productive expense: new skills can translate into a new source of revenue. They can help you serve more people, solve bigger problems and add more value to the world.
Lifestyle expenses are those you need or want in your personal life. These include things you enjoy, such as eating out, buying clothes and watching a movie.
Such expenses depend on how you live your life. Some choose to have cable TV, while others choose not to. That is a lifestyle choice.
Some frequently eat out, while others prefer to cook at home. This choice affects your lifestyle expenses.
A larger lifestyle expense could be vacations. Do you choose to take a short trip a few times a year, an exotic trip once a year, or a staycation?
The list goes on: tattoos, jewelry, shoes, furniture, cars, Champagne…
Each want, each need defines whether someone lives on credit or within their means.
You need to reevaluate what changes you need to make to achieve the lifestyle you want and deserve.
Wants vs. Needs
* What are needs? They include everything you need to live, including food, housing, transportation, insurance (health, disability, life, home, car), child care and other necessities.
* What are wants? They improve your quality of life but are not essential to live, including a gym membership, fun, vacations, gifts and beauty products. Yep, these are considered luxuries.
A simple way to tell the difference between a need and a want is to ask yourself whether you can delay spending money on something without severe consequences, such as ending up in jail, losing your home or paying fines.
If you cannot delay the expense (alimony, credit card bill, rent/mortgage), then the item is a need.
However, if you can put off the expense (fancy clothes, vacation, the latest iPhone), then the product or service is a want.
Confused? Here are 3 examples:
- Eating is a need. Buying cage free eggs, Fair Trade coffee and organic blueberries are wants.
- A car may be considered a need. Driving a Porsche is a want.
- Wearing pants is a need. Wearing $400 designer pants is a want.
Last but certainly not least are protective expenses.
These include insurance policies you need to protect you, your business and your family: life insurance, disability insurance, car insurance, health insurance, dental insurance, vision insurance, fire insurance, homeowners/renter’s insurance, theft insurance, flood insurance, liability insurance, bailee insurance, cyber security insurance… the list goes on.
This is a significant amount of money each month, but these are policies you don’t want to be without.
Paying for insurance means that you are transferring the risk of loss or damage onto someone else.
You need to be able to cover your overhead, even when life throws a curveball at you.
So where do you go from here?
Now that you know about the 4 expense categories, sit down and look at your own budget and financial situation.
Do you have too many destructive expenses?
Did you neglect some insurance needs?
Are your lifestyle expenses infringing on productive ones?
Are you not living the life you want?
Will you not be able to get by if you are affected by an emergency?
These are the questions you need to ask yourself as you review your budget and make decisions about how you might need to change your spending habits.
Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit
Are you ready to conquer your financial future? Be sure to join us in September for the VFS Virtual Conference. At the conclusion of the event, not only will you have a better understanding of your financial future, you will also have created your financial plan, and become part of a Community of like-minded Veterinarians supporting one another throughout the year.