Fixed Expense vs Variable ExpenseComparison and Differences you should know

Written By:
Adiste Mae

In designing your personal budget, you’ll notice that some expenses are easier to account for than others because they are either recurring, something that you can’t skip on, have a fixed amount of payment, or all of the above.

An example of this is the rental payments (usually monthly) you make for your apartment or home.

It’s easy to make a budget for rent because you know how much you’ll be paying and when.

Other expenses are not like that though.

For example, what you spend on gas for your car can be very unpredictable, considering that gas prices change every day, sometimes even every hour.

To make the process of designing your budget easier, we are going to review what fixed expenses and variable expenses are.

What are fixed expenses?

Try listing down all of the spending/payments you made for the last six months.

It doesn’t have to be 100% accurate, but it is a good way to get an idea of the types of expenses you are incurring each month.

Did you notice that some items appear every month in the same amounts?

A fixed expense is exactly that.

Any expense that remains constant within your budget is a fixed expense.

This makes fixed expenses predictable, which in turn makes them easier to budget for.

While they generally remain constant, they can still change but it only happens occasionally.

For example, your rental payments will remain the same unless your landlord changes the rate, or when you move to another place.

Other examples of fixed expenses are insurance premiums, car payments, real estate taxes, phone plans, and service subscriptions.

Fixed expenses are usually paid in regular intervals.

It could be weekly, bi-weekly, monthly, quarterly, bi-annually, or annually.

Take note of these intervals when making your monthly budget.

While it is uncommon for fixed expenses to change, you are still able to lower them.

It will take more time and effort than skimping on your usual discretionary expenses, but it could be all worth it.

Since fixed expenses are recurring expenses, when you lower one or more of them, it results in you saving more money every month or every payment interval.

For example, you can reduce your rental payments by moving to another place that has cheaper rent, or getting a roommate to share the rent with.

Both options do result in a major lifestyle change, which just goes to show that it isn’t easy to reduce fixed expenses (but it can be done).

However, if you do decide to reduce your fixed expenses, you’d only have to do such a money-saving decision once to reap the rewards.

Let’s go back to the rental payments example above.

Let’s say you’re currently paying $1,200 monthly.

You find an apartment that’s a little bit smaller than your current one but has the same homely feel.

The rent is cheaper there too, only at $1,000 per month.

So at the end of your current lease, you decided to transfer to the cheaper apartment.

That makes it a $200/month savings which equals $2,400 a year!

And you only need to make the decision once to save $2,400 a year.

What are variable expenses?

Let’s go back to the list of spending/payments that you wrote down earlier.

Remember the feeling when you were listing them down.

Weren’t there some items that you weren’t sure of what amount to put on?

Or maybe you just didn’t put any amount at all, just the item.

For example, you wrote down “coffee at Starbucks” or “shopping for clothes” but you weren’t entirely sure of the amount you put for them.

That’s what variable expenses are.

As the name suggests, variable expenses are expenses that vary from period to period.

Another way to look at variable expenses is to see them as a representation of your daily spending decisions.

For example, you may spend on take-out today, but won’t tomorrow.

Or that you spent more on gas today than you did yesterday.

Do note though variable expenses aren’t necessarily discretionary expenses.

Rather, they are “variable” because the amount you spend on them varies.

Unlike fixed expenses, variable expenses are generally unpredictable.

This makes them harder to budget for.

It’s not uncommon to go under or over budget for variable expenses, especially if unsupervised.

While variable costs are often discretionary (e.g. coffee at Starbucks, dining out at a restaurant, ordering take-out for dinner instead of cooking, buying game credits), they can be necessary too.

Spending on groceries is a variable expense and also a necessary expense.

Another is spending on gas for your car.

These expenses are necessary for your daily living, but the amount you spend on them is not constant.

On paper, it’s easier to cut back on variable expenses than on fixed expenses because you often have a higher degree of control over them.

Instead of spending more on take-out, you can decide to cook dinner at home instead.

Or you can choose to buy clothes at thrift shops.

However, it is often harder to cut on variable expenses in practice.

Doing so will require you to commit on a daily basis rather than just a one-time thing (with fixed expenses).

How often do you tell yourself that you won’t be going to a Starbucks anymore so that you can save money, but you end up going a week or month later?

Some variable expenses are totally out of your control too.

A prime example would be medical expenses.

If you get sick and have to pay for medical expenses, you really don’t have a choice in the matter.

Fixed vs Variable expense – what’s the difference?

The main difference between fixed and variable expenses is that fixed expenses are constant as to the amount you pay for them while variable expenses aren’t.

This makes budgeting for fixed expenses easier than it is for variable expenses.

Fixed expenses are also paid at regular intervals while variable expenses are often not (especially those that are discretionary too).

You often have a higher degree of control over your variable expenses compared to fixed expenses.

This makes them easier to cut back on – on paper that is.

In practice, cutting back on variable expenses require that you commit to it on a daily basis, whereas cutting back on fixed expenses is often a one-time thing.

There’s another type of expense that is a mix of fixed and variable expenses often referred to as mixed expenses.

An example of this would be data plans – particularly limited data plans.

These plans have a fixed component to them.

Whether or not you fully consume the data plan, you’d have to pay a fixed amount.

However, if you’ve exceeded the limit allowed by your plan, you’d have to pay a variable amount depending on how much excess data you consumed.

Budgeting your fixed and variable expenses

So now that we learned what fixed and variable expenses are, it’s time to make a budget that incorporates the both of them.

First, distinguish among your expenses which are fixed and which are variable.

It may be easier if you list down your fixed expenses as they are more predictable.

Then list down as much of your variable expenses as you can.

While some variable expenses are unpredictable and nearly impossible to exactly budget for (e.g. emergency expenses), you can look back on your previous spending which are recurring but are of different amounts.

After listing down your fixed and variable expenses, assign amounts to them.

This step is easy for fixed expenses. You’d just to put down what you always pay for them.

For variable expenses, it may be harder to put an exact amount for them.

What you can do instead is to put an estimate, or maybe lower or upper limits for the amount that you’re willing to spend on them.

For example, you can put $200-$300 for your weekly groceries, where $200 is your expected minimum spending on them, while $400 is the maximum amount that you’re willing to spend on them.

It may also be a good idea to assign a budget for emergency funds.

Review the amounts you assigned for every expense, then check their total.

Is it within your expected amount?

Are you capable of meeting it?

Or do you need to cut back on some expenses?

Remember that while variable expenses are adjustable on the go, cutting back on fixed expenses is often a one-time money-saving decision.

So even if it requires more effort, you might want to look at which fixed expenses you can cut back on first.

But of course, nothing is stopping you from cutting back on both.

So you now have a list of your fixed and variable expenses and the amounts assigned to each of them.

You already reviewed it and made the necessary revisions – this will be your budget.

The last step is to monitor your expenses according to your budget.

Pay more attention to your variable expenses, and make sure that they stay within your budget.

Refrain from making unnecessary spending that isn’t listed on your budget as much as you can.

Also, monitor your fixed expenses.

Check if there would be any changes to them (e.g. your landlord increasing your rent, increases in insurance premiums for the next year) and adjust your budget accordingly.

At the end of every month (or quarter, or year depending on your preference), compare your actual spending to your budget.

Did you go over or under budget?

Were there expenses that you didn’t include in your budget that you expect to incur again in the coming months?

Review them and make necessary adjustments to your budget.

Conclusion

Fixed and variable expenses will always form part of your total expenses.

Knowing the difference between the two helps tremendously in designing your budget.

You’d have an easier time identifying which expenses are predictable, which ones are not, and which are easier to cut back on.

It’ll be easier to monitor your spending too.