If you want to cut down your spending and build a budget you can stick to, it helps to understand the different categories your expenses can fall in to.
In case you didn’t get the hint from the title of this article, they’re called fixed expenses and variable expenses.
The difference between the two is fairly self explanatory, but we’ll go through the basics here and explain why it should matter to you (read – how you can use this knowledge to fatten your wallet).
Difference Between Fixed and Variable Expenses
Do you have bills that you pay every month, probably on the same day, that don’t change from month to month? Those are fixed expenses. Think about anything you sign up for with a recurring monthly charge, like memberships, services and utilities, as well as any debt services like mortgages or car loans. Here are some typical fixed expenses so you can get the gist of what belongs in this category.
List of Fixed Expenses
- Housing (mortgage, rent, taxes, HOA)
- Debt (vehicle loans, student loans)
- Subscriptions (magazines, Coffee of the Month Club, HBO, Hulu Plus, Netflix)
- Services (lawn care, snow removal, daycare)
- Utilities (cable, Internet, phone, electricity, gas)
On the other hand, anything that is a one-time expense or can’t be predicted is called a variable expense. All of your daily purchases fall into this category. So do things like vacations, gifts and emergencies. Here are some more.
List of Variable Expenses
- Dining out
- Medical Bills
There are some things above that blur the lines between fixed and variable, for example groceries. You probably spend about the same amount on them each week, or month, so you could say they are somewhat “fixed” in nature. Because they can be drastically different from time to time though (say you have guests for a week or you throw a party and your grocery bill doubles, or you go on a cruise and don’t buy them at all), I classify them as variable expenses.
The point of this is just to say that the reason for understanding these things is to help you build a better budget and to help you control your spending. Conforming to rigid accounting rules and definitions like a publicly traded company is pointless as an individual; you just need to understand your system and how it works for you.
So how is this all this going to help you save money?
Budgeting Fixed Expenses
The reason fixed vs. variable expenses are important all has to do with building a budget. A budget is a forecast for future spending… a plan for how you want to manage your money.
And you need to think differently about fixed and variable expenses in a budget in order to make sure you can save more money and enjoy your life, but still be prepared for the unexpected.
Fixed expenses are easy. You know exactly what they’re going to be next month, and the next, and the next, and so on. While they’re predictable, which is good from a planning perspective, they tend to be easy to overlook for this same reason. When I first went through all my bills, I was shocked at how so many little monthly charges were taking such a big bite out of my income, and I really wasn’t getting much use out of them.
To make sure you’re getting the most out of your money, you need to go over your fixed expenses every once in a while and cut back what you’re not using – magazine subscriptions, website memberships, anything like that you don’t use anymore. I think you’ll be surprised how a few dollars here and there can make a big difference in the long run.
Budgeting Variable Expenses
The key to budgeting your variable expenses is to try to budget a low number so that you can save money at the end of the month. BUT, you never want to allocate that money you’re going to save to another fixed expense.
Say you think you can spend less on dining out at restaurants each month. So you cut $100 from your budget, and end up with $1200 a year extra in spending / investing cash – that’s great – perfect use of a budget.
Now the wrong way: You want to buy a boat, but you don’t have enough extra income after your budgeted expenses, so you cut $100 from your restaurant budget, and buy a boat with a monthly payment of $100.
Now what happens when you have an emergency? Where do you get the funds from? You can’t skip the boat payment, but you can pull it back out of savings if you need to.
I hope this example helps a little to illustrate how you should think about fixed and variable expenses in your budgeting process. The goal is to have a system you understand and are comfortable with, because peace of mind when it comes to your money is a great thing!
If you’re in need of a better budget, check out our online course where we’ll teach you everything you need to know and get your budget built in just a few quick tutorials.