What is the difference between fixed and variable expenses?
Part of creating a budget is distinguishing between your fixed and variable expenses:
- Fixed costs: These are costs that remain largely constant, like your monthly rent.
- Variable expenses: These are costs that vary or are unpredictable, such as restaurant meals or car repairs.
Definition of fixed charges
Fixed expenses are those that stay constant in your budget. You always know exactly when and how much to pay, making these expenses predictable. They generally remain constant. Although they may change occasionally, this should not happen frequently. For example, if you switch to a new cell phone company or your landlord raises your rent, your fixed expenses will change.
Fixed expenses are paid in identical amounts at regular intervals. Monthly payments are the most common, but you can also pay them weekly, quarterly, semi-annually or annually. It’s important to keep this in mind when planning your budget. If you make semi-annual payments on your car insurance, for example, you need to divide the payment amount by six to figure out the monthly cost, but make sure you have enough cash on hand to make the payment up front. .
Examples of Fixed Expenses
Here are some examples of fixed payments:
- Rent or mortgage payments
- Car payments
- Other loan repayments
- Insurance premiums
- Property taxes
- Telephone and utility bills
- Childcare costs
- Tuition fees
- Gym memberships
Utility bills are considered a fixed expense, but the amount may vary slightly from month to month. However, you will still receive your bill at the same time each month and know the exact date it is due. Once you’ve received a few bills, you should be able to predict the amount of each based on your usage.
Definition of variable loads
Variable expenses change regularly and can be directly influenced by the choices you make every day. Unlike fixed expenses, variable expenses are much less predictable. That’s not to say that variable expenses aren’t necessary; many essentials fall into this category.
Due to their unpredictable nature, most people find it difficult to track and budget for variable expenses. Unless you’re adding up all the grocery receipts or relying on a budgeting app, you probably don’t know exactly how much you spend on food each month. This makes it easy to spend more than expected in certain categories without even realizing it. You can sign up for Bankrate’s myMoney to ccategorize your spending transactions, identify ways to reduce and improve your financial health.
In some cases, you have direct control over variable expenses. For example, when shopping for clothes, you may decide to buy a less expensive item to save money. Others are entirely beyond your control. Medical expenses are a good example. If you get sick and need to cover your cost to see a doctor, the insurance company will tell you what you owe. Unfortunately, you will have no choice in the matter.
Examples of variable expenses
Here are some of the common variable expenses you may need to plan for:
- Grocery and catering
- Personal care
- Home and car repairs
- Medical co-payments
How to save on fixed and variable costs
If you are looking for ways to reduce your monthly expenses, you can do so by reducing your fixed or variable costs, or both. Saving money in both categories is possible, but the process is usually a little different.
Fixed expenses generally take longer to adjust, although it is certainly possible to do so. For example, you might decide to lower your rent payments by moving into a more affordable home. Unfortunately, it’s not just a decision you can make right away. You will have to wait until the end of your lease to move out without paying to break your lease. In the meantime, you will still be responsible for paying your fixed rental costs for the number of months you have left in your contract.
On the other hand, some variable expenses are much easier to adjust in a pinch. Let’s say an emergency expense comes along and leaves you short of money for the month. It will be difficult to cut your car or rent payment to make ends meet. However, it is usually possible to reduce your variable expenses. For example, you can be more price conscious when shopping and avoid spending money on dining out or buying non-essential items.
At the end of the line
No matter how you spend your money each month, your expenses will include both fixed and variable expenses. Understanding the difference is key to planning your budget and spending your money more wisely. By dividing your expenses into fixed and variable categories, you can get a clearer picture of where your funds are going and spot opportunities to cut costs.