How Variable Expenses Affect Your Budget
Variable expenses, also called variable costs, are expenses that can change over time. These costs vary depending on your usage of products or services, and they can change depending on any number of factors. For example, increased use of your car produces a corresponding increase in your variable expenses for fuel and car maintenance. Likewise, if you have guests staying over for an extended time, your variable expense for food might increase.
Variable expenses differ from fixed expenses, such as your mortgage or rent, that remain the same throughout the term of your loan or lease. Unlike fixed expenses, variable expenses can change significantly over the course of a week, a month, or a year.
Note that variable expenses are not considered "variable" because they are discretionary or unnecessary, but because they are fluctuating. For example, your grocery bill can differ from month to month, which makes it variable, but it is not discretionary because it's not an expense you can do without.
Examples of Household Variable Expenses
Typical household variable expenses might include:
- The cost of household maintenance such as painting or yard care
- General expenses such as clothing, groceries, and car maintenance
- Resource expenses such as fuel, electricity, gas, and water
- Other expenses such as entertainment or dining out
In fact, many of your budget items might be variable expenses rather than fixed, which can make budgeting for them a little more complicated.
It's important to track your spending so you know where your money goes and can plan accordingly.
To compensate for fluctuating costs, try budgeting using the envelope method, which encourages you to keep each category under a specific dollar amount but also allows you to roll forward any unused money to the next month. Also, a savings account or emergency fund can provide cash you can dip into at times when your variable expenses are higher than expected.
Finance Software for Variable Expenses
Some personal finance software lets you set a different amount from month to month for expenses that vary. However, if you use software that doesn't include flexible budget category amounts, you can budget for the average: Find the cost for the year and divide by 12 for your monthly amount. If you spend less on a variable expense than you budgeted, it's a good idea to put that money aside so you're prepared for the months when a variable expense ends up being higher than the budgeted amount.
You'll also want to budget for and track other types of expenses, including discretionary expenses, which fluctuate in similar ways to variable expenses, and fixed expenses, which remain the same from month to month.
Reducing Variable Expenses
Trimming variable expenses is more difficult than cutting discretionary spending. Deciding not to buy a more expensive pair of shoes is an example of reducing your discretionary spending. It's a one-time decision that is much easier to make than deciding how to cut your grocery bill, which is a necessary but variable expense, because then you'd need to find a way to stick to those cuts from month to month.
Trimming your grocery bill is certainly possible and one way to reduce expenses, but discretionary spending should be your first target for cuts.
This is where financial software that helps you manage your budget can help you out. By setting your budget goals and then tracking your variable expenses, you can see where (and for what reasons) your variable expenses increase. Then you can make strategic decisions about where to allocate your money or cut costs. When higher costs seem to spring up out of nowhere, you'll be prepared instead of worrying where you'll get the money to cover them.
Variable Expenses in Business
Your personal finances are not the only place you may encounter variable expenses. In a small business, a variable cost is an expense that changes according to production or, in some businesses, with changing weather conditions.
Typical small business variable expenses would be costs for raw materials to produce goods as well as operating expenses such as office supplies or hourly payroll.
Just as with personal finance, in a small business it would help you to budget for variable expenses as well as to have a savings account with money set aside to cover higher-than-normal expenses when they occur. With proper planning, even very volatile expenses won't have to derail your business plans.