An important part of putting together a budget is differentiating between fixed and variable expenses. You’ll need to be able to make sure you’re accounting for every expense accurately to make sure your budget is working as it should. So, let’s take a look at these two categories and look at how to incorporate them into your budget.
Defining Fixed Expenses
Fixed expenses are the regular, consistent costs you rack up every month, and they typically stay the same or change very little from month to month. Generally speaking, these expenses aren’t things you can avoid. They can vary from person to person, but here are some common examples.
1. Rent or Mortgage
The monthly payment for your housing is a classic fixed expense, and there’s a good chance it’s going to be the biggest one you deal with on a regular basis. It stays fairly stable unless you make changes like downsizing and moving.
2. Utilities
Expenses like electricity, water, gas, and internet bills are generally fixed for most people. You'll pay a set amount every month unless you significantly change your usage.
3. Insurance Premiums
Health insurance, auto insurance, and homeowners/renters insurance are usually a fixed monthly payment. These expenses are important to protect your financial and personal well-being and are also mandatory in a lot of cases.
4. Loan Payments
If you have a personal loan, car loan, or student loan, the minimum payment is usually a fixed expense. There are some exceptions, like if your loan has a variable interest rate that can change over time, or with a line of credit where the amount you pay off every billing cycle will depend on how much you draw.
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5. Subscriptions
Monthly subscriptions to services like streaming platforms, gym memberships, or magazines are also fixed expenses. These costs usually stay the same unless you cancel or modify your subscriptions.
6. Property Taxes
If you own a home, property taxes are another example of a fixed expense. The amount may change over time due to property assessments, but it's a relatively consistent expense.
7. Childcare Costs
For parents, childcare expenses, whether for daycare or a nanny, are usually fixed as long as the arrangement doesn't change.
8. Transportation Costs
If you have a car and a car payment, this is a fixed expense. The monthly payment doesn't typically fluctuate unless you refinance or adjust the terms.
Understanding Variable Expenses
On the other end of the spectrum, variable expenses are costs that change from month to month. In a lot of cases, these aren’t going to be essential expenses, but that won’t apply to every example. The main defining trait here is that whether they’re essential or not, they’ll usually change to some extent from month to month. Here are some common examples of variable expenses.
1. Groceries
While you need to buy food, the amount you spend on groceries can vary significantly depending on your choices and meal planning.
2. Dining Out
Eating at restaurants, ordering takeout, or enjoying coffee shops are all variable expenses. You can control these costs by eating out less or choosing less expensive options.
3. Entertainment
Expenses related to entertainment, like going to the movies, concerts, or amusement parks, are variable.
4. Clothing and Personal Care
Shopping for new clothes or personal care items like cosmetics and toiletries is another category of variable expenses.
5. Travel
Costs related to vacations, weekend getaways, and travel are highly variable and depend on your travel choices.
How Does This Impact your Budget?
Budgeting is so important for managing both fixed and variable expenses. It involves creating a detailed plan for your income and expenses, which will help you manage your money effectively and work toward your financial goals. Here's how budgeting can help you manage both types of expenses.
Budgeting Fixed Expenses
When it comes to fixed expenses, it’s important that you make sure to have enough money set aside to cover these costs every month. Here's how you can budget for fixed expenses.
1. List Your Fixed Expenses
Start by making a list of all your fixed expenses, including their monthly amounts. This can help you get a clear picture of your financial obligations.
2. Allocate Funds
Deduct your fixed expenses from your monthly income. This will help you figure out how much money you have left for variable expenses and savings.
3. Automate Payments
To avoid missing payments on fixed expenses, set up automatic payments or reminders. This will help to make sure that you don’t miss a bill, which could lead to late fees or negative consequences, like impacting your credit score.
Budgeting Variable Expenses
Managing variable expenses in your budget is going to take a different approach, as these costs are more flexible. Here are some things you can do to budget for variable expenses.
1. Set Spending Categories
Categorize your variable expenses, like groceries, dining out, entertainment, and transportation. Figure out how much you want to spend in each category.
2. Track Your Spending
Keep records of your variable expenses. You can use a budgeting app, spreadsheet, or pen and paper. This helps you see where your money is going and identify areas where you can cut back.
3. Set Limits
Establish spending limits for each category. This keeps you accountable and helps you avoid overspending.
4. Adjust as Needed
Your budget is not set in stone. Life circumstances and financial goals change. Be ready to adjust your budget as needed to work around these changes.
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