Answer:
When making a budget, it’s important to know how to separate fixed expenses from variable expenses.
What is a fixed expense? In simple terms, it’s one that typically doesn’t change month-to-month. And, if you’re wondering what is a variable expense, it’s an expense that may be higher or lower from one month to the next.
Knowing how to include both in a budget is important to avoid overspending. It can also help with deciding how much of your income to commit to debt repayment, saving and other financial goals.
Fixed Expenses Definition
A fixed expense just means an expense in your budget that you can expect to stay the same, or close to it, over time. When you sit down to make your monthly budget, you don’t have to guess how much you’ll pay toward fixed expenses. You can simply carry over those amounts from last month’s budget.
Having one or more fixed expenses in your budget is a good thing from a planning perspective. Since these expenses are more or less constant, budgeting becomes more predictable. That can make using certain budgeting methods, such as zero-based budgeting or the 50/20/30 budget, easier.
Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments. If you budget by paycheck or schedule automatic bill payments, having bills due at roughly the same time can help with avoiding late payments and the fees that go along with them.
Examples of Fixed Expenses
Fixed expenses can include essential expenses, such as those needed to maintain a basic standard of living each month. Some of the most common fixed expense samples include:
Rent or mortgage payments
Renter’s insurance or homeowner’s insurance
Cell phone service
Internet service
Health, disability or life insurance premiums
Property taxes
Childcare expenses
Student loan or car loan payments
Water, gas and electric bills technically fit under the umbrella of basic living expenses. But these costs can fluctuate from month to month, depending on your usage and the rates your provider charges.
While they may not be necessary for basic needs, certain recurring subscriptions could also be included as fixed expenses in your budget. If you pay for a gym membership or streaming services, for example, those costs might stay the same month to month.
Saving can also be considered a fixed expense if you’re budgeting for it regularly. For instance, you may put $100 into your emergency fund every payday. If you do that consistently and include it as a line item in your budget, you may technically consider it to be a fixed expense if you don’t deviate from your savings habit.
Other less common fixed expenses may include child support payments, alimony, back tax payments you’re making through an installment plan or payments made to satisfy a judgment from a lawsuit. These kinds of payments can be the same each month for the entire period of time in which you’re obligated to pay them.
Variable Expenses Definition
Variable expenses are the opposite of fixed expenses. A variable expense may recur from month to month. But the amount you pay in any given month could be different from previous payments or ones you’ll make in the future.
Budgeting for variable expenses can be more challenging, as you may not be able to pinpoint exactly how much they’ll add up to from one month to another. If you’re not tracking variable expenses regularly, it could be very easy to under- or overestimate how much of your budget you should allocate to them. This is something you can easily do with a budgeting app, however, which can minimize the odds of variable expenses sideswiping your spending plan.
Variable expenses can include essential expenses as well as discretionary spending. For instance, if you get sick, then a doctor visit may be a necessity that you need to cover. On the other hand, a discretionary expense means anything you budget money for or spend money on that you don’t necessarily need. In other words, these represent the “wants” in your budget.
Examples of Variable Expenses
What’s included in a budget under variable expenses will vary from one person to another. But some of the most common variable expenses you may pay include:
Gas
Parking fees
Groceries
Dining out
Clothing
Personal care expenses
Healthcare expenses
Home maintenance and repairs
Entertainment
Hobbies and recreation
Some variable expenses may not be recurring. For example, you may take vacations or trips two to three times a year. The amount you spend each time may vary, but you’re not paying for those expenses monthly. Instead, you may budget for those kinds of variable expenses using sinking funds—money that you set aside for this purpose.