Your budget likely consists of both fixed and variable spending if you’re like most people. How about the meaning of these two words? How do they differ between spending on needs and discretionary items? Budgeting, setting financial goals, and many other things can all be made easier by being aware of the differences between fixed and variable expenses.
Main Points
Rent is one example of a fixed expense that doesn’t change from month to month.
Expenses that are subject to change include those for food and petrol.
By reducing your overall bills, cutting prices on fixed expenses can help you save money.
It can be challenging to cut back on variable costs because you’ll need to make thrifty decisions consistently.
What Are Fixed Expenses?
The monthly cost of fixed expenses is constant. These invoices are typically paid on a regular basis, such as weekly, monthly, quarterly, or from year to year, and they cannot be adjusted easily. 1
Budgeting for a fixed expense is significantly simpler than budgeting for a variable expense or a discretionary expense.
Regular fixed costs for a household include:
- Rent or mortgage payments
- Auto loans
- Property taxes
- Insurance costs
It is not a simple swap, but you might theoretically alter your monthly mortgage payment by refinancing your loan or by contesting your property tax assessment.
Rent payment has the same effect. Moving to a less expensive property or hiring a roommate are two ways to reduce this cost, but these are significant lifestyle changes.
Other examples of constant expenditures include your health insurance, auto insurance, life insurance, and homeowners or renters insurance. To alter these monthly payment amounts, you would need to spend a significant amount of time investigating alternative strategies.
Saving money on fixed costs
The main takeaway from this is that, despite their name, “fixed” expenses are not always predetermined. You may set aside a few hours to reduce your fixed expenses if you leave your work or decide to start saving aggressively.
Note
The money you save here might be significant because fixed expenses often make up the largest portion of your budget.
A second benefit of cutting back on fixed expenses is that you won’t feel as though your lifestyle is being restricted. It will only take you a few hours per year to compare prices for things like cell phone plans and health insurance premiums.
Once you’ve discovered these budget-friendly solutions, you should automate thrifty decisions into your monthly spending plan. In other words, because most people don’t consider your fixed monthly costs, lowering your fixed monthly payments won’t make you feel like you’re being economical. Making daily decisions like “Should I buy those jeans?” or “Should I eat at a restaurant tonight?” will make you “feel the pinch” much more.
The meaning of variable costs
These daily expenditures, such as dining out, shopping, buying coffee at Starbucks, and playing a round of golf with your friends, are represented by variable expenses.
Typical variable costs are as follows:
- Groceries
- Restaurants Gas Entertainment Hobbies
- Individual care
Note
These expenses are not regarded as variable because they are optional. As opposed to that, they are “variable” because your monthly spending varies.
Some variable expenses are needs, whereas the majority of variable costs are discretionary expenditures (such dining out, coffee shops, and golf).
For instance, the average family spends a range of sums on groceries each month. Additionally, it’s possible that you’ll spend a variety of sums each month on gas for your car as well as necessary repairs and upkeep.
Saving money on variable costs
When consumers need to start saving money, they typically aim to reduce variable expenditures first. Unfortunately, because doing so takes a daily commitment to smart decision-making, variable costs are also some of the hardest expenses to reduce.
A fixed cost, such as your mobile phone plan, insurance, or cable bundle, can be reduced by making a single decision and then sticking with it for the next few months or years.
On the other hand, reducing variable costs necessitates actively making several choices every day regarding whether or not to purchase particular goods or take part in certain activities.
The conclusion
Look at both your fixed and variable expenses if you need to start making cost reductions. Spending a Saturday afternoon going over all of your insurance policies, regular monthly fees, and memberships could help you cut hundreds of dollars from your set monthly budget.
Along with your regular monthly expenses, if you can reduce some of your variable costs, you’ll have more money available for investing, building an emergency fund, paying off debt, and saving for retirement.
Questions and Answers (FAQs)
What are recurring fixed costs?
Periodic costs are those that are consistent, reoccur frequently, but don’t happen every month (e.g., quarterly). They necessitate forward planning and budgeting to cover costs as they become due.
Which category of expenses—fixed or variable—should you plan for first?
Because they make up the majority of your budget and are typically set for longer periods of time, budget your fixed expenses first. Planning your variable spending around your fixed expenses is simpler because these change monthly and are simple to modify as you go.
Are cell phones considered fixed expenses?
A mobile phone is a fixed expense because it is a monthly bill that stays largely the same. However, if you want to make sure that this fixed price fits inside your budget, you might concentrate on lowering cell phone costs.
