Simple Variable Expense Method

Variable Expense Method (VEM) is based on a formula that requires tracking income and expenses over a finite period, like a month or year. Each time you follow your money, it predicts how much money remains in each account by subtracting your expenses from income during that fixed period. In other words, it’s a method for predicting your account balances as you go. Here are the different types of VEM:

Simple Variable Expense Method (SVEM) follows two simple steps:

1. Calculate your remaining income by subtracting your fixed expenses from your fixed income for the period.
2. To calculate your remaining expense, divide the balance of your variable income by the sum of your fixed income and expenses and multiply by the amount of time left in the period.

The following example shows how to use SVEM when starting a new job:

1. First, figure out what you can afford to spend monthly based on salary alone.
2. Calculate your fixed expenses:
3. Subtract your monthly salary expenses to get the remaining variable income.
4. Divide this variable income by the sum of salary and fixed expenses, and multiply by the length of time left in the month to get the amount you can spend on variable items.
5. The remaining amount, divided over several days in a month, will tell you how much to spend each day if you try to stick with a budget.

Average Balance Variable Expense Method

Average balance VEM follows four simple steps:

1. Calculate your changing average monthly balance.
2. Divide your average monthly balance by the days in the month.
3. Multiply this amount by the expense percentage, then subtract your fixed expenses to get the remaining variable expenses.
4. The remaining amount, divided over several days in a month, will tell you how much to spend each day if you try to stick with a budget.

Recurring Expense Variable Expense Method

With this approach, you track each expense over a fixed period. Track your income and expenses for a month and subtract your expenses from your income, and you get your spendable funds for the month. Then, divide the remaining amount by the number of days in that month to figure out how much to spend each day if you want to stick with a budget.

The following example shows how to use RVEEM when an individual is starting a new job:

1. Figure out how much you can afford to spend each month based on salary alone.
2. Estimate or collect information about fixed expenses (rent/mortgage, insurance premiums, etc.)
3. Subtract the fixed expenses from your monthly salary to get your variable income.
4. Divide this variable income by the sum of salary and fixed expenses, and multiply by the number of days left in the month, to get the amount you can spend on variable items (e.g., clothing, entertainment, dining out).
5. The remaining amount, divided over some days in a month, will tell you how much to spend each day if you are trying to stick with a budget.

In conclusion, the VEM is one of the most commonly used budgeting methods. Generally, it is a predictive method that predicts how much money you will have in your accounts at the end of each period.