You have most likely experienced dealing with all three of these expenses but probably haven’t learned how they each function.
Did you know that there are three different types of expenses? These three expenses are Fixed Periodic and Variable. Learning about the three different types of expenses can help you prepare for them and budget accordingly. If you are in a financial rut, this is a great way to take control of your finances and achieve all of your money goals. So let’s get started.
First, let’s talk about some of the most common expenses that fit in this category. These are Rent, Mortgage, Car payment, Phone, and Internet. From this list, I’m sure you can gather the similarities between each bill that make them all considered fixed expenses. We’ll go over these similarities so that you can have a better idea of what makes an expense “Fixed”.
A fixed expense is consistent in amount and frequency. They usually occur every month, but can also be weekly, biweekly, annually, or any other recurrence. For example, your rent that is due the first of each month for $1,800 or your annual Netflix subscription of $19.99. These bills are sent to you routinely (weekly, monthly, annually). These bills also are consistent in amount, meaning that they are the same amount every time and have a set amount.
There's a good chance that you already have many fixed expenses and you may notice many of them on your monthly budget. Here is a list of the most common fixed expenses that occur.
Because of their predictability, fixed expenses are usually the easiest to prepare for. When creating a budget you can easily know how much you will be spending on fixed expenses as the exact amount won’t change month to month and the timing of the billing is also consistent. You could even go through each month of your budget and put these fixed bills amount in, even though they technically haven't been billed yet.
With a simple calculation, you can even figure out how much you spend on each fixed bill yearly. For example, take a monthly payment of rent at $1,800 and multiply it by the number of bills you will receive that year which is 12 (since this is a monthly bill) and you get $21,600. Now you know that for the entire year you will be spending $21,600 on rent.
When I am creating an annual budget, I start with the fixed expenses due to their predictable amounts and that they occur regularly. I know what amounts to budget for and how often I will be paying that amount.
A way to significantly lower your monthly budgeted expenses is to lower your fixed expenses. Since these expenses are consistent, you will be saving money every time you are billed, which can add up pretty fast. For example, if you can lower your rent by $100 a month, that is $1,200 saved annually!
You can lower your fixed bill payments by negotiating the price. You can do this by comparing the price rates of other similar companies and contacting your current service provider to see if they will match these rates. It cost a company way less to keep an existing customer than to get a new one, so it’s in their best interest to negotiate with you to come up with a price that you are both satisfied with.
When interest rates are low, it is a great idea to refinance your house. By doing this you lock in a lower interest rate and therefore pay less interest a month on that mortgage. When we refinanced our house we were able to lower our mortgage payment by over $200 a month, which adds up to a lot of savings in the long run.
My last tip for lowering fixed expenses is by jumping on deals that are going on. This can be by switching phone providers when companies are having new customer deals or even locking in a lower internet bill by switching providers. This does take some research in order to know what deals are currently being offered, but there are usually several going on at the same time.
We typically switch our insurance provider every year as rates tend to go up after the first year. Have your insurance agent shop around for lower rates to make sure you are keeping those fixed expenses in check. The total cost of your fixed expenses can be significantly lower if you take the time to be aware of what you are paying and take action to lower actual expenses.
Next up are periodic expenses. These are similar to fixed and variable expenses, with just one major difference. Periodic expenses can be both consistent and inconsistent in amount, but they always occur in predictable intervals. The key component of periodic expenses is that they occur in less frequent intervals. Most periodic expenses are every three or six months. This type of expense is less common than fixed expenses but it is a good idea to still be aware of them and keep on track with your budget.
Common periodic expenses are automotive expenses like regular oil changes or your annual registration or holiday gift-giving. You should be able to predict when these expenses occur and for how much, they just don't occur as often.
While periodic expenses do not show up as often as fixed expenses, you may come across a few of them every year and it is important to make note of and plan for them. Here is a list of some periodic expenses.
When it comes to the cost of periodic expenses, their amount can sometimes be lowered by finding cheaper alternatives. Look to the tips for lowering fixed expenses to see if you can lower these bills as well. Shopping around for better deals can help.
Planning and preparing for periodic expenses is the route to go. Your personal budget will not be accurate if you do not account for all of your periodic expenses. Periodic expenses have the same due date, though they won't occur on every monthly budget. The first step to plan for periodic expenses is to look at your budget for the entire past year. List out all examples of expenses that are considered periodic. Next, go over your financial plan and make an educated guess on if these expenses will most likely stay the same, be lower, or be higher in the current year. You can then take the amount of each line item and divide it by 12 months. Each month you will either be saving for a future periodic expense or paying for one.
Here's an example:
According to last year's budget, we spent $2,000 on Christmas expenses. This year we will be traveling more for the holidays and therefore predict that we'll be spending an extra $1,000. We also can consider inflation of 10% overall. That makes this year's Christmas budget $3,300 (($2,000 + $1,000) x 1.10%). We can then take the $3,300 and divide it by 12 months which equals $275 ($3,300/12). Now every month we set aside $275 for Christmas and are prepared by the time the period expense occurs.
Variable expenses are just like they sound, they are expenses that vary in frequency and amount. Due to their variability, variable costs tend to be harder to predict, but they are typically the easiest to control.
Some variable expenses are necessary expenses, for example, buying gas for your car, paying your utility bill, and buying groceries. These are expenses that you need to live your life, or in other words, living expenses.
The other type of variable expenses are less important and are considered discretionary. Discretionary spending is when you buy things that you don’t need but want. Some examples of discretionary variable expenses are vacations, recreation, and hobby expenses.
Knowledge is power, and like the other expenses, you must be aware of what variable expenses you incur in your daily life. Here are some common examples of variable expenses.
An easy way to lower variable expenses is to be aware of what you are spending and set limits for each category. This can be done by monitoring spending and frequently updating your budget. When you know how much you are spending currently, you can then see if your spending habits fit with your financial situation. There are many budgeting apps that you can use to help stay up to date on how much you have spent on each category for the month. They do the tracking for you and all you need to do is frequently check these categories. Maybe after reviewing your financial situation you decided you have an emergency fund to build and need to lower monthly expenses by $50. Or maybe you thought you were spending less on an expense than you really are. Either way, it is a good thing to know what is going on with your finances.
An example of budgeting for variable expenses could be when you notice that your grocery bill is getting pretty high. A great way to know what the average American is spending on groceries is to review our article “How Much Should I Spend on Groceries?” and keep your family situation and location in mind. If after reviewing you’ve determined that you can lower your bill by $100 a month you have more steps to take. The next steps would be to keep track of every time you buy groceries and look for cheaper alternatives to grocery items you tend to purchase.
After reviewing the three types of expenses, Fixed, Periodic, and Variariable, I hope you can gain more insight into what kinds of expenses you come across and can approach budgeting more successfully. Knowing the characteristics of each expense is a great way to be able to better predict them and set an accurate budget that will help you have more success with your financial goals. By using historical data from past budgets and categorizing them accordingly, you can feel better about your personal finances.