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Becoming financially literate is one of the biggest and most beneficial investments you can make. A big part of that process is learning how to handle your expenses.
Knowing where your money needs to go allows you to budget properly and plan. But expenses aren’t just simple, consistent numbers.
Some of your bills will stay consistent while others change, making it a bit more difficult to accurately plan your finances.
This is why it’s important to understand the difference between fixed and variable expenses.
This article will give you a basic rundown of the two to help you understand and budget as effectively as possible.
Fixed vs. Variable Expenses Overview
What Are Fixed Expenses?
Let’s start by looking at fixed expenses.
As you might guess, fixed expenses are expenses that remain constant over time. These expenses aren’t easy to change, making them likely to remain consistent from month to month or year to year.
Because of this, fixed expenses tend to be far easier to budget for. You can easily and reliably plan for fixed expenses.
While it is far more difficult to save on fixed expenses, the benefits can be enormous. Because they are recurring, any money saved will compound over time.
If you can save on fixed expenses, it is absolutely worth the effort. Doing so typically requires refinancing, moving, or selling your car for a more affordable option.
While this kind of thing can be a hassle, it can save you significant money.
Examples of Fixed Expenses
Fixed expenses are recurring. Think of things like health insurance, car insurance, mortgage payments, or rent.
Things like property taxes are also fixed expenses. The government will likely hold these expenses steady, meaning you will see the same bills year to year.
Fixed expenses can vary slightly. For instance, utility bills are considered fixed expenses, although they won’t be exactly the same each month for most people.
Most of the big, consistent bills you face month to month will be examples of fixed expenses. These things are pretty much set in stone or at least require a prolonged effort to change.
What Are Variable Expenses?
In contrast to fixed expenses, variable expenses are not consistent over time. They tend to be sporadic and, as the name implies, variable.
Compared to fixed expenses, variable expenses are quite easy to change.
Variable expenses include discretionary purchases. They aren’t solely limited to discretionary purchases, as some variable expenses are always necessary.
Saving on discretionary expenses is generally quite easy, but the payoff is one-time in nature.
Examples of Variable Expenses
Examples of variable expenses include most day-to-day purchases. Your daily coffee run is a variable expense. Going out for lunch is a variable expense.
Variable expenses aren’t always optional, though. For instance, groceries are a variable expense. You have to buy groceries, but what you buy and in what quantities can differ significantly.
In addition, gas is a variable expense. You can certainly control parts of it, as you can drive less and walk more, but there is also variability in gas price. Even if you use, say, one tank a week, the cost of that tank will differ from week to week.
How Do Fixed and Variable Expenses Affect Your Financial Budget?
As you can imagine, fixed and variable expenses will have different impacts on your budgeting.
Fixed expenses tend to have the biggest impact on your budget, as they set the foundation of your overall financial picture.
Things like car payments, health insurance, and mortgages tend to be the biggest expenses people pay each month.
That doesn’t mean variable expenses are insignificant, though. Variable expenses impact your budget significantly as well. This is especially true of those who aren’t particularly diligent about monitoring their spending.
A week of eating out when you normally cook can be an unpleasant and costly surprise.
It can help to picture your expenses visually. If your budget is a jar, the fixed expenses are big rocks, filling up the largest portion of the jar.
By contrast, the variable expenses are like sand. They fill the gaps left by the fixed expenses. They’re also what is most likely to cause an overflow, which in this case is synonymous with spending more than you make.
How to Budget for Fixed and Variable Expenses: Plan Ahead, Save Later
While it is entirely possible to save on both fixed and variable expenses, the steps required to do so will be fairly distinct. Here’s how you should approach budgeting for both.
#1. Know Your Budget
The first thing you want to do is get a clear picture of how much you can afford to spend while also meeting your saving goals.
Knowing this will give you the framework for figuring out how much you can spend on both types of expenses.
#2. Figure Our Your Monthly and Annual Expenses
Once you’ve figured out how much is coming in, you’ll want to gain an understanding of your monthly and annual (fixed) expenses.
Subtract this number from your overall budget, and you’ll have the money you can spend on your variable expenses each month.
#3. Track Your Expenses
Now that you understand your fixed expenses, you’ll need to grasp how much you’re spending on the variable expenses. The best way to do this is to track your spending.
Tracking your spending will show you how much money goes to day-to-day purchases and give you insight into where you can save.
#4. Budget Accordingly and Always Save Money Each Month
If you’ve got a solid understanding of your budget and all of your expenses, you’re ready to start planning. Build a budget and stick to it. A simple budget to follow is the 50/30/20 Budget Rule.
Your budget should always include some form of saving. No matter how small, setting money aside each month will build good financial habits and set you up for a healthy financial picture in the long run.
This may involve cutting back on some of your variable expenses. Try to find easy swaps like making your own coffee or packing lunches for work to minimize the felt impact of these cutbacks.
#5. Consider Downloading a Budgeting App
Setting a budget, monitoring your spending, and sticking to it long term can be difficult and time-consuming.
Luckily, there are a host of apps out there designed to help you with this.
If you struggle to keep track of your expenses or frequently overspend, consider downloading a budgeting app to make the process easier.
>> Learn More: Best Budgeting Apps
Bottom Line: Fixed vs. Variable Expenses
Understanding how to manage and save on both fixed and variable expenses can pay huge dividends.
While variable expenses are easier to save on, fixed expenses tend to have a greater impact on your overall finances.
That said, the real key to financial health is setting a budget that balances the two and allows you to save each month.
Prioritize budgeting and making smart decisions about your spending, and you’ll be far better off for it.