Fixed Expenses vs. Variable Expenses: What’s the Difference?
Budgeting, quite simply, is the act of spending your money efficiently. The importance of budgeting cannot be overemphasized, and whether you’re looking at your individual finances or running a company, knowing how to allocate funds for fixed and variable expenses will help you keep your head above water.
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Fixed Expenses vs. Variable Expenses: Quick Take
If you want to make sure you have enough money for necessities and unplanned expenses, you must create a budget. For that, learning the difference between fixed and variable expenses is imperative.
What Are Fixed Expenses?
Fixed expenses include expenses that are constant in your month-to-month budget. Since these expenses are predictable, you know how much you will be expected to pay. These types of expenses might fluctuate, but they stay pretty close to the same cost most of the time. Here are some key points to know:
Your apartment’s rent is a fixed expense. You pay the same amount every month. Yes, your landlord might increase after a year, but that’s not a frequent change.
In most cases, you have to pay fixed expenses at regular intervals in identical amounts. The most common intervals are months. For example, you may be paying $2,000 every month in rent, mortgage or total cost of living.
Some fixed expenses are also paid annually, bi-annually or quarterly.
When budgeting, you must keep this interval in mind to ensure that you’re correctly making the monthly expenditure. For example, if you pay biannually on your car insurance or other goods or services, you must divide by six to calculate the per month cost for your insurance.
Common Examples of Fixed Expenses
While it’s true that the amount you need to pay for a utility bill or childcare costs can change every month, for the most part, they are still considered a fixed expense since you get your bill on the same day every month and tend to remain fairly constant. Below are common fixed expenses:
Rent payments
Loan payments
Property taxes
Insurance premiums
Childcare costs
College or school tuition fees
Internet subscription fees
Phone and utility bills
Budgeting With Fixed Expenses
Most people imagine a budget to be a complicated spreadsheet with multiple fields and formulae. However, the trick to getting your budget right is to keep it simple. Here are some tips:
You should keep your budget simple by writing down all your fixed expenses, such as quarterly, annual or monthly charges. You can even break it down by varying products and services to see where you have room to edit if possible.
This will give you a clear picture of how much you can save and what you’re spending. Plus, it will allow you to see areas on paper where you can cut back.
You can trim down some of your fixed expenses to create more room for savings. For example, you can save money on your insurance plan by looking for an insurer with better deals.
What Are Variable Expenses?
Instead of being predictable, variable expenses change regularly and can be affected by your day-to-day choices. Variable costs per unit or period of time are less predictable than their fixed counterparts. Here are some key takeaways:
Since it’s comparatively difficult to measure or calculate variable expenses beforehand, you may struggle with this part of budgeting. Fortunately, there are apps and templates available online to simplify this.
Another thing to note about variable expenses is that you often have a high degree of control over them. For instance, if you’re buying clothes, you can choose to go to a thrift shop rather than a designer boutique.
However, not all variable expenses are in your control. For example, if you have a medical emergency, you have no choice but to head to the hospital and pay your medical bills.
Common Types of Variable Expenses
Knowing your financial habits and trying to cut down on unnecessary costs can go a long way to helping you achieve your financial goals. You can often edit down variable expenses. Here are some examples of variable expenses:
Entertainment
Gasoline
Medical copays
Clothing
Eating out
Groceries
Personal care
Car repairs
Home maintenance and repairs
How To Save on Variable Expenses
Since variable expenses can change, you might find it hard to manage them. However, once you create a clear line between what is essential and what isn’t, budgeting will be easier for you. Here are some tips to save on your variable expenses:
Try saving money on your groceries since they form the most significant part of your variable expenses. Really consider if the item you pick up is something you need or is in your budget.
When you’re on a tight budget, you should breakdown and categorize your variable expenses as “needs” or “wants.” This will help you distinguish which are most important.
Does your room really need a fresh coat of paint, or are you just tempted to do it because you binged some room makeover video on YouTube the night before? Make sure you analyze your shopping list to check if everything is necessary before heading out to the store.
To cut down on your variable expenses, you may have to make some lifestyle changes. For example, if you’re currently eating out five times a month, you might want to reduce it to three times to lower your variable costs.
Budgeting is only the first step. Sticking to your budget is often more difficult than creating a budget since it requires making lifestyle adjustments and having a certain degree of self-control.
It may help you stick to your plan if you remember the benefits of good money management: you could be debt-free with considerable savings sooner than you think.
Final Take To GO
Budgeting can be easier when you breakdown your expenses into three categories — needs, wants and savings. 50% goes to necessities, 30% to wants and 20% to the savings category, also known as the 50/30/20 budgeting method. You can also change the percentage according to your circumstances but make sure you’re budgeting for the essentials first. After that, track your variable expenditures and give them a certain percentage. Finally, put the rest into savings.
FAQ
Here are the answers to some of the most frequently asked questions about fixed and variable expenses.
What are examples of a fixed expense?
Here are some common examples of fixed expenses:
Rent payments
Mortgages
Loan payments
Property taxes
Insurance premiums
Childcare costs
Gym memberships
Internet subscription fees
Phone and utility bills
What are five examples of fixed expenses?
Here are five examples of fixed expenses:
Rent payments
Mortgages
Loan payments
Property taxes
Insurance premiums
What are examples of flexible expenses?
Flexible expenses are similar to variable expenses as they are discretionary purchases that can be altered or eliminated without a significant impact to your lifestyle. These non-essential expenses could be streaming subscriptions, clothing or dining out.
What are variable expenses?
Variable expenses are expenses that change regularly and can be affected by your day-to-day choices. Variable costs are less predictable than their fixed counterparts.
What is an example of variable expense?
Here are some common examples of variable expenses:
Entertainment
Medical copays
Clothing
Eating out
Groceries
Personal care
Car repairs
Home maintenance and repairs
Scott Jeffries contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: Fixed Expenses vs. Variable Expenses: What’s the Difference?
