Fixed vs. variable expenses: What’s the difference?
Understanding how fixed expenses and variable expenses work can help with budgeting and financial planning. Fixed expenses don’t change from month to month, which can make it easier to know whether you have money to cover them. Variable expenses, on the other hand, can fluctuate.
What you’ll learn:
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Fixed expenses are costs that are typically constant. They include things like mortgage and car payments, insurance premiums, and tuition.
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Variable expenses—such as groceries, gas and entertainment—are costs that can fluctuate.
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There are several budgeting strategies that might help you track and manage both fixed and variable expenses.
What is a fixed expense?
A fixed expense is a cost in your budget that’s generally predictable and regular. These expenses are often paid monthly. If they’re scheduled quarterly or annually, they may be known as “periodic fixed expenses.”
Because of their predictability, fixed expenses can be easier to account for in your budget.
Examples of fixed expenses
Some examples of fixed expenses include:
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Mortgage or rent payments
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Installment loan payments
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Car or homeowners insurance premiums
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Property taxes
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Internet and cable bills
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Childcare expenses
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Gym memberships
What is a variable expense?
Variable expenses are costs that change in amount or regularity or both. These fluctuations may be influenced by the choices you make or by outside forces. For example, inflation could drive up your grocery costs, but so can the decision about what to buy.
Because variable expenses are unpredictable, they can be challenging to track and budget for. Sometimes it’s possible to control how much you spend on things—entertainment, for example. Other variable expenses, such as car repairs, might be more difficult to control.
Examples of variable expenses
Some examples of variable costs include:
- Food costs for groceries and dining out
- Clothing
- Gasoline
- Entertainment
- Utilities
- Home and car repairs
- Emergency medical bills
- Personal care items
How to budget for fixed and variable expenses
Developing a budget that includes fixed expenses and variable costs could help you balance essential bills with fun (but less necessary) extras, such as entertainment and dining out. Here are some tips as you get started.
1. Calculate your total income
Calculate what you make in a year and identify what you make after taxes and other deductions. You can divide this amount by 12 to determine your monthly take-home pay. This can serve as your baseline.
2. List your fixed expenses
Your fixed costs include things like car payments, mortgage or rent payments and childcare. You can refer to recent bank and credit card statements to make sure you include all your regular obligations.
3. List your variable expenses
Your variable costs are things like groceries or utility bills. Since these costs can change, you can get a better idea of how much you spend on them each month by calculating their average cost.
For example, you can figure the average monthly cost of your utilities by totaling what you spent on each monthly bill over the past year and dividing the sum by 12.
4. Review essential vs. nonessential items
Once you’ve listed your fixed and variable expenses, you can categorize them as essential or nonessential. This can help you see whether there are any areas where you might cut back if needed.
5. Choose a budgeting strategy
There are a variety of budgeting methods that you can use to track your spending. The best option depends on your needs and circumstances.
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Zero-based budget: With zero-based budgeting, every dollar is allocated toward a purpose. The goal is for your income minus expenses to equal zero at the end of the month. You can allocate funds to fixed costs and assign a specific budget to each variable cost.
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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 variable and fixed costs in each category.
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Envelope budget: With envelope budgeting, you divide your income into several categories. Some categories may include variable expenses, while others may be fixed. After deciding how much to spend on each category, you 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: Pay-yourself-first budgeting focuses on savings goals, but you’ll still pay fixed and variable expenses each month. You start by defining your goals and how much you want to contribute toward them each month. Then you budget your remaining income toward bills, including both fixed and variable expenses. You may need to adjust your savings goals periodically to make sure you can cover essential costs.
Fixed vs. variable expenses FAQ
Here’s more information about the difference between fixed and variable expenses.
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 keep in mind that essential expenses can be fixed or variable.
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.
How can I save on fixed expenses?
Some ways you could make adjustments to your fixed expenses include:
- Shopping around to find the best insurance premiums
- Researching internet or cellphone providers to see whether there’s a more affordable option
- Comparing interest rates when shopping for a loan
- Refinancing an existing loan if interest rates have decreased or if your credit scores have improved
How can I save on variable expenses?
Variable expenses can be more difficult to track and control than fixed expenses. But you might be able to get some benefit from adjusting how you manage these costs. For example, you may be able to reduce grocery costs by using coupons or comparing prices across stores.
Key takeaways: How fixed and variable expenses compare
From month to month, your fixed expenses don’t often change. Variable expenses, on the other hand, are unpredictable. But there are several ways to budget for both types of expenses.
The best budgeting system is the one that helps you pay your bills, cover fun expenses and save toward your financial goals.
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