If you're like most people, your budget is comprised of both fixed and variable expenses. But what do these two words mean? How do they differ from necessities vs. discretionary spending? The answer is important to know, and it just may surprise you.
Definition of Fixed Expenses
Fixed expenses cost the same amount each month. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year.
It's much easier to budget for fixed expenses than it is to budget for a variable expense or discretionary expense.
Typical household fixed expenses are mortgage or rent payments, car payments, real estate taxes and insurance premiums. While you could theoretically change your monthly mortgage payment by refinancing your loan or by appealing your property tax assessment, this is not an easy switch.
The same is true if you pay rent. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes.
Your health insurance, car insurance, life insurance, and homeowners or renters insurance are also examples of fixed costs. You would have to spend several hours researching alternate plans to change these monthly payment amounts.
Saving on Fixed Expenses
The major lesson here is that in spite of their name, “fixed” expenses are not necessarily set in stone. If you lose your job or aggressively want to start saving, you could devote a few hours to culling your fixed expenses.
Since fixed expenses typically represent the biggest chunk of your budget, the money you save in this category can be quite substantial.
Saving money on fixed costs has a second advantage: You won't feel as though you’re curbing your lifestyle. Shopping around for a cheaper health insurance premium or a less expensive cell phone plan will only require a few hours of your time each year.
Once you’ve found these low-cost options, you should automate frugal choices into your monthly budget. In other words, lowering your fixed monthly bills won’t make you feel like you’re being frugal, because most people don’t think about their monthly fixed costs. You’ll “feel the pinch” much more when you make day-to-day decisions like “Should I eat at a restaurant tonight?” or “Should I buy those jeans?”
Definition of Variable Costs
Variable expenses represent those daily spending decisions like eating at restaurants, buying clothes, drinking Starbucks, and playing a round of golf with your buddies.
These costs are not considered variable because they’re discretionary. Rather, they're "variable," because the amount that you spend differs from month to month.
While most variable costs represent discretionary spending (such as restaurants, Starbucks, and golf), some variable costs represent necessities.
Most families, for example, spend variable amounts of money on groceries each month. In addition, you're likely to spend different amounts each month on putting gasoline in your car and paying for necessary car repairs and maintenance.
Saving on Variable Expenses
Variable costs are usually the first expenses that people try to cut when they need to start saving money. Unfortunately, variable costs are also some of the toughest expenses to cut back on, because doing so requires a daily commitment to frugal decision-making.
Trimming a fixed cost, like your cell phone plan, insurance, or your cable package, requires only making a decision once, and then living with that decision for the next several months or years.
Trimming variable costs, on the other hand, requires actively making multiple decisions every day about whether or not to buy certain items or participate in specific events.
The Bottom Line
If you need to start cutting back on costs, look at both your fixed and variable expenses. Devoting a Saturday afternoon to reviewing all of your subscriptions, insurance plans and recurring monthly bills may help you trim hundreds of dollars from your fixed monthly budget.
If you can cut back on some variable costs in addition to your fixed monthly bills, you’ll free up more money to save for retirement, build an emergency fund, pay off debt or invest.
Frequently Asked Questions (FAQs)
What are periodic fixed expenses?
Periodic expenses are those costs that are the same and repeat regularly but don't occur every month (e.g., quarterly). They require planning ahead and budgeting to pay periodically when the expenses are due.
Which should you budget for first, fixed or variable expenses?
Budget your fixed expenses first, because they make up the majority of your budget and are usually set for longer periods of time. Your variable expenses fluctuate monthly and are easy to adjust as you go, so it's easier to plan these around your fixed expenses.
Is a cell phone a fixed expense?
Because it is a bill you pay every month and remains roughly the same, a cell phone is a fixed expense. Still, you can work on bringing cell phone costs down to make sure this fixed expense fits in your budget.