Assets vs Expenses
Assets are items that we purchase that will be used for more than one year. When an item is used up within a year it is considered an expense.
Assets are the resources that will be used in the future. Expenses are the costs that the company uses to support operations and are consumed within the year.
If a vehicle is purchased, normally it is used for more than one year. Since it would not be fair to expense the entire amount in the current year (as we are paying over time) only the portion for this year is expensed. For example, a $10,000 vehicle is expected to last 5 years, $2,000 per year will be expensed as the asset is “Used Up”. Visit The Accounting Guide for more information.
Discretionary vs Non-Discretionary
Discretionary expenses are part of your normal out-of-pocket expenses but are wants rather than needs. They are things you could live without, but chances are you won’t.
For example, discretionary expenses include books, magazines, entertainment, impulse purchases, dining, travel, etc.
Non-Discretionary expenses are mandatory. Think about your last home or car repair for Unexpected. Taxes are typically annual or semi-annual. Rents or mortgages are monthly. Food is a good example of weekly.
What to Look For
When looking at expenses, define the following:
- Top priorities for non-discretionary include food and shelter
- Meals at home and dining out
- Rent or mortgage payment, real estate taxes, etc.
- Utilities: heat, electricity, and water
- Car loans or lease payments
- Insurance: home, renter’s, vehicle, and medical
- Credit card payments, other loans, and commitments