What types of costs are there?

Fixed and variable costs

Costs can be categorized into two groups based on their fluctuation patterns: fixed and variable. Fixed expenses remain constant in volume from month to month, encompassing items such as Internet service fees, entrance cleaning costs, insurance premiums, loan repayments, and similar obligations. On the other hand, variable costs exhibit periodic changes, resulting in varying amounts payable each month. Examples of variable expenses include utilities, groceries, transportation, entertainment, and other discretionary expenditures influenced by personal choices or decisions.

Regardless of whether a cost is fixed or variable, there is always potential for reduction. The extent to which variable costs can be reduced depends on individual plans and behaviors. For instance, domestic travel may incur lower expenses compared to international travel. Thus, the discretion lies with the individual in determining the desired expenditure level. In certain cases, reducing fixed costs may entail exploring alternative service providers or substitutes. However, it is important to consider whether a particular expense is driven by personal preference or necessity.

Is spending determined by the need or desire?

Within the realm of expenditures, two distinct categories of individuals can be identified: those whose income is allocated to cover all expenses, and those whose income fluctuates from month to month. Understanding human needs and wants can shed light on this behavioral distinction.

Every individual has needs and wants. Needs encompass everything essential for existence, such as maintaining good health and fulfilling basic sustenance requirements. Wants, on the other hand, encompass things that are not necessary for survival but contribute to happiness, enjoyment, and the desire for acquisition. Examples of wants may include a new car, a delectable cake, or a vacation home in a specific resort.

By categorizing needs, we can identify four main areas:

Other desires, such as a house with a modern design or branded clothing, fall beyond the scope of needs and are classified as wants.

One might question whether rational spending entails completely forsaking desires and satisfying only needs. The answer is a resounding no. Working diligently allows individuals to pursue their desires. A prudent allocation of income implies fulfilling wants only after satisfying needs. Additionally, wise spending entails financing wants and needs to the greatest extent possible using personal funds and, if necessary, through reasonable loans.