Spending money is easy. Keeping track of where that hard-earned cash goes? Not so much. According to a poll by the Certified Financial Planner Board of Standards, only 41 percent of Americans track their spending plan every month. But if you’re among the 69 percent of consumers who live paycheck to paycheck, tracking expenses is an essential first step in finding ways to put money into savings.
Part of creating a budget is distinguishing between your fixed and variable expenses. Knowing the difference can help you improve your financial stability – and be more prepared for unexpected costs. Let’s explore how fixed expenses and variable expenses are different from each other and what they might look like in your monthly budget sheet.
What are your fixed expenses?
Your fixed expenses are those that remain constant within your budget. You always know exactly when and how much you need to pay, making these expenses predictable. They generally remain constant. While it’s possible for them to occasionally change, this shouldn’t 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 most common, but you may also pay them weekly, quarterly, biannually or annually. This is important to keep in mind when planning your budget. If you make biannual payments on your car insurance, for example, you should divide the payment amount by six to understand the monthly cost, but make sure you have enough cash on hand to make the payment up front.
Here are a few examples of fixed payments:
- Rent or mortgage payments
- Car payments
- Other loan payments
- Insurance premiums
- Property taxes
- Cell phone and utility bills*
- Public transportation fares
- Childcare costs
- Tuition fees
- Gym memberships
Utility bills, however, are a bit tricky. Some utilities, such as your water or electricity, can also be variable expenses since the amount can change every month. However, you’ll always receive your bill at the same time each month and know the exact date it’s due. Once you’ve received a few bills, you should be able to predict how much each will be based on your usage.
What are your variable expenses?
Unlike fixed expenses, variable expenses are much less predictable. These expenses regularly change and are directly influenced by the choices you make on a day-to-day basis. This isn’t to say that variable expenses aren’t necessary; many essentials fall into this category.
Due to their unpredictable nature, most people struggle to track and budget for variable expenses. Unless you add up every grocery receipt or rely on a budgeting app, you probably don’t know exactly how much you spend on food every month. This makes it easy to spend more than what you intended in certain categories without even realizing it.
In some cases, you have direct control over variable expenses. For example, when purchasing clothing, you can decide to buy a cheaper item to save money. Others are entirely out of your control. A good example of this is medical expenses. If you get sick and need to cover your copay to see a doctor, the insurance company will tell you what you owe. Unfortunately, you won’t have any choice in the matter.
These are some of the common variable expenses you might need to plan for:
- Groceries and dining out
- Personal care
- Home and car repairs
- Medical copays
How to save on fixed and variable costs
If you’re looking for ways to reduce your monthly expenditures, you can do so by reducing your fixed or variable costs – or both. Saving money in either category is possible, but the process is usually a bit different.
Fixed expenses generally take more time to adjust, although it’s certainly possible to do so. For example, you might decide you’d like to reduce your rent payments by moving to a more affordable home. Unfortunately, this isn’t just a decision you can immediately make. You’ll have to wait until the end of your lease to move without paying to break your lease. In the meantime, you’ll still be responsible for paying your fixed rent costs for however many 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 up and leaves you short on cash for the month. It will be difficult to reduce your car or rent payment to make ends meet. Bringing down your variable expenses, however, is usually possible. For example, you can be more mindful of prices when grocery shopping and avoid spending money on dining out or purchasing items that aren’t necessities.
No matter how you spend your money every month, your expenditures 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 being allocated and spot opportunities to reduce costs.
Source: Bankrate / Featured image by freepik