Fixed vs. variable expenses: What’s the difference?
Predictability can be great, especially when it comes to your budget.
Fixed expenses don’t change from month to month, which makes it easier to know whether you have money to cover them. Variable expenses, on the other hand, can fluctuate. But what are some examples of fixed and variable expenses? And how can you budget for them? Read on to learn more about fixed and variable expenses.
Key takeaways
- Fixed expenses are costs that are typically constant.
- Variable expenses are costs that can fluctuate.
- There are a variety of ways to budget for fixed and variable expenses.
- The best budgeting system is the one that works for you.
What is a fixed expense?
A fixed expense is a cost that’s typically constant.
Fixed expenses are paid at regular intervals—often monthly. Some fixed expenses are what are known as “periodic fixed expenses.” These expenses are fixed and regular, but don’t occur monthly—they may occur quarterly or annually instead, for example. Knowing how often you pay these expenses can help you manage your money.
Examples of fixed expenses
Some examples of fixed expenses include:
- Mortgage or rent payments.
- Loan payments, such as auto loans or student loans.
- Insurance premiums, such as for car insurance and homeowners insurance.
- Property taxes.
- Internet and cable bills.
- Childcare expenses.
What is a variable expense?
Variable expenses are costs that fluctuate. These fluctuations may be influenced by the choices you make or by outside forces. For instance, inflation in the economy may drive up your grocery costs—but so can the decision one week to stock up on food.
Because variable expenses are unpredictable, it may be challenging to track and budget for them. But it’s possible to control how much you spend on these costs. When shopping at the grocery store, for example, you could buy cheaper items or choose only the essentials. Other variable expenses, such as car repairs, are more difficult to control.
Examples of variable expenses
Some examples of variable costs include:
- Food costs, such as groceries and dining out.
- Clothing.
- Gasoline.
- Entertainment.
- Electric and gas utilities.
- Repairs for your home and car.
- Emergency medical bills.
How to budget for fixed and variable costs
It can be a good idea to figure out a budgeting system that includes fixed expenses and allows for variable costs, too. That way you’ll cover all essential bills each month before deciding how much to spend on nonessential variable expenses, such as entertainment and dining out.
Zero-based budget
With the zero-based budgeting approach, every dollar is allocated toward a purpose. The goal is for your income minus expenses to equal zero at the end of the month. To create this type of budget, write down how much you take home each month. Next, list fixed costs and distribute money toward each. Although you won’t know how much you’ll spend on variable expenses, allocate a certain budget toward each. The variable costs might include expenses but also debt repayments and savings.
50/30/20 budget
A 50/30/20 budget requires you to split your expenses into three categories: needs, wants, and savings or debts. Using this approach, you’d spend up to 50% of your income on needs, 30% on nonessentials and 20% on savings and debt repayment. There may be both variable and fixed costs in each category.
Envelope budget
With the envelope budgeting system, you’ll divide your income into several categories, such as bills, groceries, gasoline, and entertainment. Some of the categories may include variable expenses, while others are fixed. After deciding how much to spend on each category, put that amount of cash into an envelope and spend no more on that category. This approach involves using cash, but you can adapt it using mobile apps.
Pay-yourself-first budget
The “pay yourself first” budget focuses on savings goals, but you’ll still pay fixed and variable expenses each month. To set up this type of budget, you would define your goals and how much you want to contribute toward them each month. Then budget your remaining income toward bills, which may include fixed and variable expenses. You may have to adjust your savings goals periodically to make sure you can cover essential costs.
Fixed vs. variable expenses FAQ
Is it better to budget for fixed or variable expenses first?
It may be easier to budget for fixed expenses first because you know how much these cost. But it’s more important to make sure you’re budgeting for essential expenses, which might include both fixed and variable expenses.
Which budgeting method works best for variable expenses?
There’s no one best way to budget for variable expenses, so you’ll need to find a system that works for you. The envelope system may help you avoid overspending on variable costs because you have a designated amount for each expense. On the other hand, you might use the “pay yourself first” budget to prioritize savings or the zero-based budget to ensure your money goes toward various goals.
Fixed vs. variable expenses in a nutshell
From month to month, you probably know how much you spend on fixed expenses because these don’t change often. Variable expenses, on the other hand, are unpredictable. But there are several ways to budget for them.
The best budgeting system is the one that helps you pay your bills, cover fun expenses and save toward your goals.