Fixed and variable expenses are terms used to describe costs that are either consistent or fluctuate over time. Understanding how the two are different can help you improve your finances and understand where your money is going. Keep reading to find out more about both types of expenses.
What are fixed expenses?
Fixed expenses, also known as fixed costs, are expenses that remain static on a regular basis. Fixed expenses typically make up the largest percentage of your budget since they consist of necessities like your monthly rent.
However, not all fixed expenses are necessities. For example, your streaming service subscriptions are fixed costs but are not necessary for you to survive (unless you really, really need to finish binge-watching Bridgerton).
Examples of fixed expenses
Common examples of fixed expenses include:
Can I change my fixed expenses?
Yes, you can lower your fixed expenses. While they don’t change month to month, you can, for example, look for cheaper alternatives to services that you don’t use a lot. If you don’t use your gym membership often but still want to have the option should the fitness mood strike, you can swap your premium studio for a more budget-friendly, no-frills gym. Lowering your monthly fixed expenses can help you save money and free up your budget.
Another benefit to lowering fixed expenses is that you probably won’t feel like you’re sacrificing much to do so. You only need to make a cost-cutting decision once for each category to save more money.
What are variable expenses?
Variable expenses, also known as variable costs, are expenses that can continuously change. They are more difficult to estimate than fixed expenses since they can increase or decrease over time. Variable expenses are partially comprised of discretionary spending. For example, do you pick regular or premium gas when filling up your car?
Variable expenses can be tougher to cut out than fixed expenses because trimming them may require daily discipline to say no to more expensive decisions. You may not notice that your insurance copay is lower on a regular basis, but you might mourn the loss of your daily Frappuccino.
Examples of variable expenses
Common examples of variable expenses include:
How to predict variable expenses
Variable expenses can change, but that doesn’t mean they’re impossible to predict. For instance, you could go through last year’s bank statements to see how much you spent on variable expenses overall to give yourself a rough estimate. Check out your grocery bills, utility bills, etc. Unless your life circumstances or spending have changed drastically, you’ll be able to use these as a benchmark.
How to create a budget
If you have a stack of bills due and want to know how to pay off credit card debt, you may want to create a budget. Sticking with a budget can help you stay on track with both your fixed and variable expenses. Here are a few tips for creating a budget:
Here are a few tips for creating a budget:
Assess your financial situation
Take time to gather your financial paperwork and assess your finances. Calculating your net worth and disposable income can be helpful for knowing your full financial picture.
Calculate your fixed and variable expenses
Determine your average monthly fixed and variable expenses to the best of your ability. While variable expenses can be hard to predict, you should be able to make a rough estimate.
See where adjustments can be made
Once you’ve reviewed your monthly expenses, see where small tweaks can be made to help you cut costs.