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Budget Line Graph
Fixed Expenses
In the previous lesson, we established that fixed expenses are expenses that occur every month like the power bill, cable bill, cell phone bill, insurance, rent etc and they are fairly consistent in their cost or at least predictable. When planning our budget, we listed all of these under the section labeled fixed expenses. We also subtracted those fixed expenses from our net income to find our spendable income. There are many things that can come from the spendable income category. These things can vary greatly from one person to the next. They can also vary greatly from one month to the next for the same person.
Spendable Income
My family spends a great deal of time camping in the summer yet we rarely camp in the winter. Therefore, camping expenses would not fall under fixed expenses for us. Our camping expenses would actually be considered variable expenses and fall in the category of spendable income.
Variable Expenses
A variable expense is one that can change over time according to a number of factors. For instance, during the month of December many parents notice a significant change in the amount of money they spend on groceries because their kids are home for half of the month eating meals at home that they normally would not eat there.
One thing that we should all understand about a balanced budget is that if we spend more in one area, we are going to have to spend less in another one.
Shopping
Suppose you go shopping with your friends and you have $45.00 to spend. Your friends also want to go and eat while you are out. As the amount you spend on food increases, the amount you have to shop with decreases.
Let's say you have spent $12.00 for your food. How much do you have to spend shopping?
Answer: $33.00
What if you spent $30.00 on food? How much do you have to spend shopping?
Answer: $15.00
Budget Line Graph
We can model this situation in a budget line graph such as the one below. Any point on the line will give us a possible spending plan for the day. Notice that if you spend $45 for shopping, you have $0 left to spend on food and vice versa.
Any point on the line allows up to live to the max (go home broke). Any point below the line, such as (10,20) or $10 for food and $20 for shopping, is feasible and makes money available for other things such as savings or another outing with friends. Any point above the line, such as (25, 25), is infeasible, you do not have enough money to spend $25 of food and $25 on shopping.
We can write an equation of the budget line. We know by looking at our graph that the y-intercept is 45 and the slope is -1. We can substitute these two values into the slope-intercept formy = mx + b of an equation and our result will be y = -x + 45.
