Fixed expenses cost the same amount each month and are usually paid on a regular basis. One example of a fixed expense is rent. Variable expenses can change based on the day, week or month. Although discretionary spending is often a variable expense, variable expenses can be necessities, too. For instance, medical costs can be categorized as a variable expense.
It’s important to know what your fixed and variable expenses are so that you can build an effective and realistic budget.Fixed Expenses
Typical fixed expenses include car payments, mortgage or rent payments, insurance premiums and real estate taxes. Typically, these expenses can’t be easily changed. On the plus side, they’re easy to budget for because they generally stay the same and are paid on a regular basis. Some fixed expenses may be discretionary, like a gym membership or streaming service subscription.
Although these bills are consistent each month, you may still be able to lower their costs. If you’re signed up for a monthly service that you rarely use, there may be an alternative plan with a lower price. For example, consider a cheaper gym membership or a different streaming service. Additionally, shop around for alternative car insurance, health insurance, life insurance and homeowners or renters insurance plans to save more money.
When you lower your fixed expenses, you automatically save more money each month or pay period. That’s because fixed expenses tend to take up the biggest percentage of your budget. So when you lower your fixed expenses, you lower the percentage of your budget that’s devoted to them. This is a great alternative to being frugal with your other spending decisions, such as buying new clothes or ordering takeout. The little bit you save on your fixed expenses can add up fast.
For example, if you spend $1,100 instead of $1,185 per month on rent, the quality of your apartment and neighborhood may not change much. However, that $85 per month will turn into $1,020 in one year. The best part? You only have to make that money-saving decision once to see the reward.Variable Expenses
Variable expenses represent your daily spending decisions. Do you buy conventional or organic produce? Do you get Starbucks or make coffee at home? Not all variable expenses are discretionary expenses. Variable expenses are defined as such because the amount you spend may vary each month.
Although variable costs are quite often discretionary expenses, some may be necessities. Buying gas for your car each month is a variable expense, as are car repairs and maintenance. Grocery shopping is also a variable expense. Your utility bills may also be variable expenses because they may change from month to month. For example, you might spend more on electricity in July than you do in December because of air conditioning.
Variable expenses may be harder to cut back on than fixed expenses because they can affect your lifestyle. You may have to choose between staying in for dinner and going out with your friends. Or maybe you need to decide between buying new clothes or seeing that new movie. Cutting back on variable expenses requires more day-to-day willpower than cutting back on fixed expenses.Know Your Financial Habits
Many of your variable expenses may end up being fairly predictable. If you go through the previous year’s credit and debit card statements, you may begin to see a pattern. For example, maybe you go to the movie theater once a week. Cutting back and only going to the movies once a month might be a great way to save more money.
You can also use the past year’s data to estimate how much you often spend on categories of variable expenses. For example, you could have a groceries category, a utilities category and a travel expenses category. Next, see how much you spent on these categories during the previous year and divide that number by 12. You can then set aside that amount each month for each variable expense. If you want, you could even open separate savings accounts for each variable expense category. This could help you clearly see how much you have left to spend on each category every month. It could also turn variable expenses into expenses you can anticipate and budget for each month, just like your fixed expenses.
In addition, monitor your fixed expenses. If your insurance premium is going to go up in the next year, you can plan in advance for that. Cancel any monthly services you didn’t realize you were still paying for, too. Staying on top of monthly fees will help you make sure you’re not paying for anything you don’t use.The Bottom Line
Although it may be easier in theory to cut back on variable costs, it may actually be easier in practice to cut back on fixed costs. That’s because it’s harder to change your decision when it becomes part of your lifestyle. Plus, it might not feel like a sacrifice, while cutting back on your fun spending probably would. Lowering your fixed costs creates automatic, non-optional saving. Not only will you be able to free up money to pay down debt or save for your future, you may not have to give up as much of your lifestyle.Budgeting Tips
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