Most people have a list (real or imaginary) that consists of both their fixed and variable expenses. But what do these two words mean? One essentially refers to the steady month-to-month necessities you pay for, while the other is considered more discretionary spending.
It’s important to know the difference between a fixed and variable expense, especially when it comes to setting your budget or working to cut costs each month to save money. Discover what a fixed vs. a variable expense is and how they work into your financial plan.
What is a fixed expense?
A fixed expense is something that generally costs you the same amount of money every month. Because you know how much fixed expenses will be, they can be one of the easier items to add to your monthly budget. If your car payment is $402.30, you can add that as a line item to your budget, right down to the cent.
While fixed expenses typically remain the same within your budget, they can still change occasionally, like when you switch to a new cell phone provider or your landlord decides to raise your rent.
Why they matter: The more fixed expenses you have in your budget, the better it is from a planning perspective. Since these expenses are consistent, budgeting then becomes more predictable. Because of this, fixed expenses can make using certain budgeting methods, such as zero-based budgeting or the 50/20/30 rule, much easier to implement.
Examples of fixed expenses
Fixed expenses can be both basic necessities and recurring non-essential lifestyle items. Here’s some examples of fixed expenses:
What is a variable expense?
Variable expenses are simply costs that change from month to month. Just like fixed expenses, variable expenses can include both “needs” and “wants,” but are generally a little more impacted by your spending decisions. For example, you have to eat food, but some months you may spend a good chunk of cash on groceries and eat out very little, while other months you may dine out more and buy fewer groceries.
Variable expenses can be trickier to add to your budget because you do have to estimate. To understand how much of your budget to allocate to a certain variable expense, take a look at your previous spending in that category.
Examples of variable expenses
Variable expenses will ultimately vary from one person to another. But some of the most common variable expenses include:
Budgeting for fixed vs. variable expenses
Budgeting for fixed and variable expenses is important for planning purposes and getting ahead financially. If you have both types of expenses to pay each month, these tips can help you budget for them:
- Have and use your budget. Having a budget in the first place is important and so is keeping track of your spending. Using zero-based budgeting or the 50/20/30 rule can help you set up a budget that includes all of your expenses. Then, you can also use different budgeting apps to make the process even more convenient.
- Budget for basic needs first: Prioritize your basic needs over “fun” spending. This means budgeting for housing, food, and other necessities before budgeting for your next vacation or streaming services.
- Track your variable expenses: Keep tabs on how much you typically spend on each variable expense. This can help you budget the correct amount, decide if you want to work on saving money in that category, and keep an eye on costs that are creeping upward.
How to save on fixed vs. variable expenses
If you’re looking to save more money, looking at your fixed and variable expenses is a good start. Saving money in both categories is possible, but the process for each can differ.
If you’re looking to save money on some variable expenses, you can cut back on “fun” spending and shop around for variable basic necessities. The good thing about having variable expenses in your budget is you have more control over them than with fixed expenses, so it’s typically easier to find those opportunities to save funds.
Fixed expenses may be harder to reduce, but that doesn’t mean it’s impossible. Because fixed expenses include things like loan payments, housing, and insurance premiums, you may need to make huge adjustments like refinancing a loan or moving to adjust these costs. That effort can be well worth it if the savings are significant.
Should I be tracking my fixed and variable expenses each month?
It’s a good idea to track all of your expenses from month to month to get a bigger picture of how much you’re spending and how much you need to live. It’s also an easier way to find out what you actually need vs. what can be cut out of your budget. If you aren’t already tracking these expenses, no need to worry! Now is the perfect time to pick a budgeting method that works for you and get started.
Should investments be labeled as a fixed or variable expense?
Your investments can be viewed as a fixed or variable expense, depending on the type. For example, if you have $100 deducted from your checking account every month for a Roth IRA, this can be listed as a fixed expense, since it doesn’t change from month to month. But, if you’re interested in buying individual stocks periodically, this amount can fluctuate as different stocks cost different amounts and you can change how much you purchase in a given month.
What are periodic fixed expenses?
Periodic expenses are costs that are the same and repeat regularly, but don’t occur every month. They require you to plan ahead and budget to pay periodically (quarterly/bi-annually) when the expenses are due.
What should you budget for first, fixed or variable expenses?
It’s wise to budget for your needs first, whether those are fixed or variable. For example, your TV streaming service may be a fixed expense and groceries may be variable, but food is more essential. Many fixed expenses are necessities, so you are likely to find that you budget for fixed expenses first.
Final thoughts: The main difference between fixed vs. variable expenses and why it's important
Knowing the difference between fixed and variable costs is important when creating a budget and tracking your monthly expenses to stay ahead. As we’ve now learned, the major difference between the two is that fixed expenses tend to stay the same each month, while variable expenses will fluctuate.
When you sit down to go over your monthly expenses, knowing which bills are fixed vs. variable will help you set aside the correct amount of money. This can show you where you can cut costs, or if you need to plan on bringing in more money to cover your expenses and free up more money to save for things like an emergency fund or paying off debt.