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SmartAsset: Fixed Expenses vs. Variable Expenses for Budgeting

For personal budgeting purposes, fixed expenses are the costs that you can forecast with confidence because they don’t change from month to month or period to period. They tend to take up the largest percentage of your budget because they are things like rent or mortgage payments, car payments and insurance premiums. Variable expenses, on the other hand, are hard to know before you incur them. You can estimate them, but there is the possibility that they will be higher or lower than what you anticipated. Examples are groceries, gas and utilities. As these examples show, although discretionary spending is often a variable expense, variable expenses can be necessities too.

A financial advisor can help you put a financial plan together for your future.

What Are Fixed Expenses?

Typical fixed expenses include car payments, mortgage or rent payments, insurance premiums and real estate taxes. Typically, these expenses can’t be easily changed. On the plus side, they’re easy to budget for because they generally stay the same and are paid on a regular basis. Some fixed expenses may be discretionary, like a gym membership or streaming service subscription.

Although these bills are consistent each month, you may still be able to lower their costs. If you’re signed up for a monthly service that you rarely use, there may be an alternative plan with a lower price. For example, consider a cheaper gym membership or a different streaming service. Additionally, shop around for alternative car insurance, health insurance, life insurance and homeowners or renters insurance plans to save more money.

When you lower your fixed expenses, you automatically save more money each month or pay period. That’s because fixed expenses tend to take up the largest percentage of your budget. So when you lower your fixed expenses, you lower the percentage of your budget that’s devoted to them. This is a great alternative to being frugal with your other spending decisions, such as buying new clothes or ordering takeout. The little bit you save on your fixed expenses can add up fast.

For example, if you spend $1,100 instead of $1,185 per month on rent, the quality of your apartment and neighborhood may not change much. However, that $85 per month will turn into $1,020 in one year. The best part? You only have to make that money-saving decision once to see the reward.

What Are Variable Expenses?

SmartAsset: Fixed Expenses vs. Variable Expenses for Budgeting

One way of describing variable expenses is that they represent your daily spending decisions. Do you buy conventional or organic produce? Do you get Starbucks or make coffee at home? Not all variable expenses are discretionary expenses, however.

Although variable costs are quite often discretionary expenses, some may be necessities. Buying gas for your car each month is a variable expense, as are car repairs and maintenance. Grocery shopping is also a variable expense. Your utility bills may also be variable expenses because they may change from month to month. For example, you might spend more on electricity in July than you do in December because of air conditioning.

Variable expenses may be harder to shrink than fixed expenses because they can affect your lifestyle. You may have to choose between making dinner and getting take-out. Or maybe you need to decide between buying new clothes or seeing that new movie. Cutting back on variable expenses requires more day-to-day willpower than cutting back on fixed expenses.

How to Change Your Financial Habits to Save on Variable and Fixed Expenses

Many of your variable expenses may end up being fairly predictable. If you go through the previous year’s credit and debit card statements, you may begin to see a pattern. For example, maybe you get a haircut every four weeks. But could you stretch a haircut to last six weeks? That would save you roughly three haircuts, which at, say, $30 a pop, is  $90.

You can also use the past year’s data to estimate how much you typically spend on categories of variable expenses. For example, you could have a groceries category, a utilities category and a travel expenses category. Next, see how much you spent on these categories during the previous year and divide that number by 12. You can then set aside that amount each month for each variable expense. If you want, you could even open separate savings accounts for each variable expense category. This could help you clearly see how much you have left to spend on each category every month. It could also turn variable expenses into expenses you can anticipate and budget for each month, just like your fixed expenses.

In addition, monitor your fixed expenses. If your insurance premium is going to go up in the next year, you can plan in advance for that. Cancel any monthly services you didn’t realize you were still paying for, too. Staying on top of monthly fees will help you make sure you’re not paying for anything you don’t use.

Bottom Line

SmartAsset: Fixed Expenses vs. Variable Expenses for Budgeting

Sometimes creating and sticking to your budget is a matter of a few clever tricks. Although it may be easier in theory to minimize variable costs, it may actually be easier in practice to lower fixed costs. That’s because it’s harder to change your decision when it becomes part of your lifestyle. Plus, it might not feel like a sacrifice, while cutting back on your fun spending probably would.

Lowering your fixed costs creates automatic, non-optional saving. Not only will you be able to free up money to pay down debt or save for your future, you may not have to give up as much of your lifestyle.

Budgeting Tips

  • Consider working with a financial advisor who can help you build a proper long-term budget. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Make sure you have an accurate picture of where your money is going. If you’re having trouble cutting costs at first, consider accounting for every cent you spend. That way, while you work on curbing your spending habits, you’ll have an accurate picture of where you’re spending too much and how much you need to save. One way to do this? Try the 50/30/20 budget.

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Sarah Fisher Sarah Fisher has been researching and writing about business and finance for years. She has worked for the Consumer Financial Protection Bureau and her work has appeared on Business Insider and Yahoo Finance. Sarah has a bachelor's degree from Georgetown University and is from New York City. When she isn't writing finance articles, she dabbles in animation and graphic design.
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