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When it comes to budgeting, a solid plan is crucial. However, most people don’t know where to start. They look at their bank statements and just feel overwhelmed.
One of the most helpful things you can do is divide your expenses into categories. There are two major types of expenses to consider when budgeting: variable expenses and fixed expenses.
This article will explore fixed expenses so you can better understand what they are and why they should form the bedrock of your financial planning.
To start, let’s define fixed expenses.
What Is a Fixed Expense?
Fixed expenses are expenses that stay constant over time. Compared to variable expenses, fixed expenses are easy to plan for since you know what to expect.
Fixed expenses tend to involve big financial commitments that you must pay regularly. Your mortgage or auto loan payment are classic examples of fixed expenses.
For the most part, fixed expenses are largely unavoidable. They are just part of doing this thing we call “life.”
How Fixed Expenses Work
Fixed expenses are recurring, unchanging expenses. Loans paid back over long periods make up most fixed expenses.
Because fixed expenses typically involve loans, the payments are agreed upon in advance and are thus not affected by changes in the broader market. This is the main difference between fixed and variable expenses.
Your financial situation and budgeting do not affect or impact fixed expenses. Apart from refinancing your mortgage, paying off a loan completely, or getting rid of insurance, fixed expenses will remain with you for the vast majority of your life.
Are Fixed Expenses Monthly or Annually?
Fixed expenses can be measured either monthly or annually. However, we encourage all people to approach fixed expenses from both a monthly and annual perspective.
For example, let’s say you are utilizing the 50/30/20 budgeting rule. About 50% of your monthly budget will go to what we call “essentials.” These are unavoidable, necessary expenses to protect the financial future of your family and yourself.
Examples of Personal Fixed Expenses
Fixed expenses are usually large, recurring expenses. The two best examples of fixed expenses are your mortgage or car payment; however, these are certainly not the only fixed expenses. Here are a few others:
- Monthly Rent
- Insurance (Health, Auto, Home, Renters)
- Internet Bill
- Phone Bill
- Energy Bill
Fixed expenses don’t have to be perfectly uniform, though. Utility bills are considered fixed expenses even though they can fluctuate month to month.
How to Factor Fixed Expenses into Your Budget
Factoring fixed expenses into your budget is easy. The consistency of the expenses makes planning simple.
Fixed expenses should be the first thing you consider when creating a budget. Since they are unlikely to change, they are easy to predict, track, and remember.
Review your previous month’s spending patterns. Start by identifying recurring payments. Add them up and subtract them from your total monthly income. This will give you the money you have each month for variable expenses and savings.
Can Fixed Expenses Be Avoided?
Fixed expenses are pretty much impossible to avoid. If you pay rent or a mortgage, you will have fixed expenses.
However, financially free people focus their efforts on paying off large debts first or debts with the highest interest rate. If you want to pursue this route, then check out our guide on the debt avalanche method.
How to Manage Fixed Expenses
#1. Start Tracking
The first step in managing fixed expenses is understanding them. Track your expenses and take note of which are recurring and consistent. These are your fixed expenses.
#2. Download a Budgeting App
If you struggle tracking your expenses through bank statements or receipts, a budgeting app may be a great tool to add to your arsenal.
These apps (such as You Need a Budget) can easily analyze your spending and help you stay conscientious of where your money goes each month.
#3. Cancel Subscriptions You No Longer Need or Use
One of the few instances of a changeable fixed expense is a subscription service. Many people forget about these long after they stop using them.
Bottom Line: What Is a Fixed Expense?
A fixed expense is an expense that is consistent and recurring.
Fixed expenses are important to understand both for financial clarity and to make a sound and practical budget.
Most fixed expenses are necessities and require a lot of time and effort to change. As such, these expenses are best taken as a given and used as the backdrop of your budget.