Understanding Fixed Expenses
Fixed expense is an expense in your budget that you believe to be fixed or at least, will unlikely to change much over a set period of time. When it comes to preparing the required monthly budget you don’t need to make a lot of assumptions on the fixed costs. That way, you can always just transfer those figures to this month’s budget.
Having one or more fixed expenses in your budget is good from a planning view. What is more or less constant is these expenses, thus budgeting is made easier. That helps when trying to employ specific budgeting techniques, like the zero-budgeting technique or the 50/20/30 budget technique.
Other than the amounts where fixed expenses are paid roughly the same amount each month, they may also be paid on approximately the same date each month. Once again, the advantage here is that perhaps structuring your budget may be less of a hassle if less rigid when it comes to bill payments consider the many bill payments one has to make monthly. When you pay your bills with money received per paycheck or set payments be automatic, then having some grouped in due at nearly the same time can help one avoid extra fees and unfavorable ramifications of late bill payment.
Examples of Fixed Expenses
There are necessary expenditures which making include fixed costs and relaxant to keep the minimum comfortable level of existence for a month. Some of the most common fixed expense samples include:
Rent or mortgage payments
Auto insurance, Health insurance, Renter’s insurance or homeowner’s insurance
Cell phone service
Internet service
Insurance premium for health, disability or life insurance
Property taxes
Childcare expenses
Loan to study or loans on a car.
Essentials can be tentatively interpreted as including such things as water, gas and electric bills as they are necessities of life. Still, these costs can be variable in that they depend on the level of your consumption and tariffs set by your providers.
Some subscriptions may not be considered as essentials, but there are those, which you may have to subscribe to which may also be consider as a fixed expense in your monthly budgeting. If you subscribe for a gym membership or some streaming service, those subscription fees might not be changed from one month to another.
They can also be seen as fixed if you are making frequent savings in your narrower budget. For example, you may invest $ 100 in your Emergency Saving Fund each time you are paid. Thus, you might consider this as a fixed expense provided you conduct it continuously and allocate it for it an expense budget or line.
Other infrequent stabilized costs are child support, alimony, tax arrears that you’re paying in installments or payments being made according to a judgment on a legal case. Such kinds of payments can be fixed monthly and constant for the whole length of time you are required to make the payment.
Variable Expenses Definition
Variable expenses are costs which are opposite to fixed costs. A variable expense may be incurred periodically, they may be incurred frequently from one month to the other. However the size of the payment you have to make in a given month is not equal to the previous or future payments you are going to make.
With regards to variable expenses, it can be difficult to know how much they amount to at the end of one month and beginning of the next. When you have not been recording variable expenses often, you could either under or over spend your budget which is not healthy for variable expenses monitoring. Something you can do with a budgeting app, however, is to reduce the likelihood of variable expenses derailing your budget.
Recurrent expenses can be both fixed and other expenses of spending within a given period of time. For instance, if you get a flu, then booking an appointment with a doctor might just be something you cannot avoid paying for. On the other hand, a discretionary expense refers to anything that you set aside cash for or spend cash on and you do not need to. For your convenience, these are vice often referred to as the “wants” in your budget.
Examples of Variable Expenses
As you will see, what is included under variable expenses in a budget will also be in variance with the other person. But some of the most common variable expenses you may pay include:
Gas
Parking fees
Groceries
Dining out
Clothing
Personal care expenses
Healthcare expenses
Home maintenance and repairs
Entertainment
Hobbies and recreation
Some variable costs do not have to be regular. For instance, it is possible to traveling or going on holidays twice or thrice per annum. The amount that is spent at any one time may differ but you are not budgeting for such expenses each month. But these might be restrained in terms of the amount that you can spend; you may use sinking funds for this kind of variable expenses.
Fixed costs and variable costs and how best to deal with them: Step-by-step guide
To achieve the above factor, there is the need to balance between the fixed cost and variable cost. Here’s how:
Step 1: List and Group Expenditures
Check out your bank statements and receipts as well.
Main fixed costs should be distinguished from variable costs.
Step 2: Prioritize Essential Expenses
Fixed costs should be paid in full.
The expenditure of variable costs should be properly funded according to necessity and significance.
Step 3: Create a Monthly Budget
Use the 50/30/20 rule: They split their earnings between Wentworth’s expenses 50%, Mig’s expenses 30% and savings/repayment of the debt, 20%.
Step 4: Monitor and Adjust Spending
Personally, you can use applications or excel sheets to track your expenditure.
Find out where you can reduce your expenses particularly on the variable costs part of it.
Step 5: Build an Emergency Fund
It is advised that one should budget for 3-6 months of their fixed expenditures, in case of some emergency.
Some of the Fixed and Variable costs
Example 1: Monthly Budget Breakdown
Fixed Expenses:
Rent: $1,200
Car Payment: $300
Insurance Premiums: $200
Internet: $50
Variable Expenses:
Groceries: $400
Dining Out: $150
Gas: $100
Entertainment: $100
Example 2: Adjusting for Financial Goals
If your goal is to save for a vacation, you could:
Reduce Variable Expenses:
Reduced dining from $150 to $50.
Decrease in entertainment from $100 to $50.
Reallocate Savings:
Invest the $150 that you cut on variable costs into your vacation account.
Tips for Saving Money on Fixed and Variable Expenses
Things you can do to cut costs on fixed and variable expenses
If you could use some more breathing room in your budget, then possibly the easiest way is to try and save as much as you can in a month. The way to save money will differ depending on whether you are working on your fixed or your variable costs.
While some fixed costs may well be quantified with relative ease, other may be deemed easier to reduce down. For instance, the common saver may be able to save on renter’s insurance, homeowner’s insurance, or car insurance due to the difference in the companies one can use. On the other hand, if you want to save on housing you might have to change your place of residence or if you already have a mortgage you might want to change your loan provider.
About paying debts, you may be able to cut costs by, say, renegotiating for a more favorable rates for consolidation of bills. Using a 0% introductory balance transfer offer for example, could be of big help in not having to pay high amounts of credit card interest. That, of course, is on the condition that you will be able to clear the entire balance before the expiry of the promotional rate. It also means you can refinance your student loans or combine debts with a low rate personal loan for financial gain.
Thus, with an aim of reducing your variability expenses, your may have to make certain personal changes. Some examples include reducing or eliminating meals out and new wardrobes to name but a few. You could also cut costs on food by pre-purchasing meals, using coupons or turning to store brands.
The benefit of variable expenses is that as an individual you can regulate them much more than is possible with fixed expenses. That is why, as a rule, it is much simpler to search for such opportunities to reduce the spendings.
How to Budget for Fixed and Variable Expenses
Failing to include both fixed cost and variable cost into your budget, or providing smaller amounts for both or either of the two, is another common budget mistake. If you have both types of expenses to pay each month, these tips can help you budget for them accordingly:
Budget for essentials first. Most of the time, your fixed expenses are also your most important ones: basic needs that include; a roof over your head, insurance, child care expenses. Thus, it’s only logical that in your budget allocating the income for the month, you ensure the bills come before aspects like eating out.
Track variable spending. If you’re not monitoring costs to know how much you spend for the variable expenses, you will likely end up with a failed budget plan. This is important as tracking your variable expenses offers an insight in the way the specific categories within your budget behave over a specified period of time and thus assist in determining the amount of money that should be set aside for the particular expenses.
Know your baseline. If you are jobless or you belong to the gig economy, it is not a bad thing to start having a baseline budget. This is purely the basic amount which one would require to make ends meet every month. Remembering this amount could mean a lot in how much of that budget you need to apply for variable OD expenses.
FAQ’s
1. Can an expense be both fixed and variable?
Yes, some expenses can have both fixed and variable components. For example, a utility bill may have a fixed base charge and a variable amount based on usage.
2. How can I reduce fixed expenses?
- Negotiate lower rates for rent or insurance.
- Refinance loans to secure lower interest rates.
- Cancel unnecessary subscriptions.
3. Are fixed expenses always essential?
Not necessarily. Some fixed expenses, like gym memberships or premium streaming services, are discretionary and can be eliminated if necessary.
4. Why are variable expenses important for budgeting?
Variable expenses offer flexibility in your budget. Adjusting them can help you save more or accommodate unexpected costs.
5. How do fixed and variable expenses impact financial planning?
Fixed expenses form the baseline for essential costs, while variable expenses provide opportunities for saving and discretionary spending. Balancing both is key to effective financial planning.