Ever feel like your money disappears faster than a TikTok story? Budgeting can really help you stay on top of your finances, but first, you need to understand your expenses—starting with the differences between fixed and variable expenses.
Think of your budgeting like building a house. Fixed expenses are the foundation, the solid support that stays the same month to month. Variable expenses, on the other hand, are like changeable features like lighting and paint color, fluctuating depending on your needs and lifestyle.
Let’s break it down: define fixed expenses and variable expenses, cover budgeting tips and ways to save on both.
What are fixed expenses?
Fixed expenses are the costs that remain constant or predictable each month—those bills you can rely on paying regularly. Knowing these exact amounts is crucial for creating a realistic budget and keeping your finances on track.
Some fixed expenses examples include:
- Rent/mortgage payments: The cost of putting a roof over your head, whether you're renting or owning your home.
- Utility bills like electricity, water, and gas: While these bills might fluctuate slightly depending on usage, they generally stay within a predictable range.
- Loan payments: Student loans, car loans, personal loans—these come with fixed monthly payments you need to factor in.
- Insurance premiums: Car insurance, home insurance, health insurance, for instance. They keep you protected but also come with a set monthly cost.
- Property taxes: Owning property usually involves annual or bi-annual property tax payments.
- Subscription services: Streaming services, gym memberships, and other subscriptions typically have a flat monthly rate. These can add up, so factor in their monthly cost.
What are variable expenses?
Variable expenses are the opposite of fixed expenses—they're costs that fluctuate from month to month depending on your lifestyle choices, needs, and external factors. Despite being less predictable, they also play a crucial role in budgeting and financial planning.
Here are some variable expenses examples:
- Groceries: Your grocery bill can vary depending on how often you cook at home, your dietary needs, and even impulse purchases.
- Dining out: Eating out at restaurants, grabbing coffee, or takeout orders all fall under this category. These expenses can fluctuate significantly depending on your dining habits.
- Entertainment: Movies, concerts, tickets to sporting events, and nights out with friends.
- Transportation: Gas for your car, public transportation fares, or rideshare services. These costs depend on how much you travel and your chosen mode of transportation.
- Clothing and personal care items: New clothes, haircuts, toiletries, and other personal care items can add up, but the amount you spend can vary depending on your needs and shopping habits.
- Hobbies and recreation: Whether it's photography, cycling, or video games, hobbies can involve variable costs for equipment, supplies, or event fees. (Speaking of free time, here are 25 affordable ways to spend your time, not your money!)
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How to budget for fixed and variable expenses
Creating a budget might seem overwhelming for some, but it's definitely worth it—it's like having a roadmap for your money. An effective budget covers both fixed and variable expenses, giving you a clear picture of your financial situation. Here's how to get started:
1. Categorize expenses
Start by dividing your expenses into two categories: essential needs and non-essential wants. Most essential needs are fixed expenses, including housing, healthcare, and child care, while non-essential wants cover things like dining out and traveling.
2. Set realistic limits
Don't just list your expenses—assign realistic spending limits to each category. This helps you stay on track and avoid overspending.
“Prioritize those essential fixed expenses first—things like housing, utilities, and debt payments. Once those are covered, you can look at ways to trim your variable spending,” says Steven Kibbel, a financial planner, entrepreneur, and financial advisor at Prop Firm App.
3. Choose a budgeting method
There are lots of ways to budget. One popular method is the 50/30/20 rule, where you allocate 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment. (To better understand how it works, here's a look at its pros, cons, and everything in between.)
4. Embrace budgeting tools
Budgeting apps or spreadsheets can be very helpful. “I often recommend PocketGuard,” Kibbel says. “It's user-friendly and does a great job of automatically categorizing expenses, setting spending limits, and providing insights into spending habits.” With tools like this one, you have a clear vision of your variable and fixed expenses and you can make cuts if necessary.
5. Be aware of seasonal variations
Certain expenses naturally fluctuate throughout the year. Holidays might lead to increased spending on variable expenses, such as gifts and travel. Factoring in these seasonal variations ensures your budget is prepared for these predictable upswings.
Need more? Read this next: How to Make a Budget in 7 Steps (Plus, a Spreadsheet For You)
Bonus tips for monitoring and adjusting your budget
A budget shouldn't be set-in-stone—it's a living document that needs regular review and adjustments. Keep it aligned with your financial goals and any changes in your financial situation.
Track your expenses regularly
Regularly review your budget to see where your money is going so you can identify patterns and areas where you might be overspending. “Without a clear picture of it, it's nearly impossible to make informed decisions about spending and saving,” Kibbel says.
Adjust your budget as needed
Stay flexible and willing to adjust your budget as your financial situation shifts. This could mean moving money between categories or cutting back on non-essential spending to cover unexpected expenses.
Build an emergency fund
Ideally, you should have enough money to cover three to six months' expenses. “Life happens! Cars break down, appliances need replacing, and medical emergencies crop up,” Kibbel says. “That's why I always stress the importance of building an emergency fund. This safety net can prevent you from derailing your budget when unforeseen costs arise.”
Saving money on variable and fixed expenses
Once you've created your budget, you might find the need to cut down on spending—and this can be done with both variable and fixed expenses. Take a look at our tips:
Negotiate fixed expenses whenever possible
For fixed expenses like rent, don’t be afraid to negotiate. Review your lease agreement carefully, research market rates in your area, and be prepared to make a well-reasoned argument if you believe your rent is too high.
Shop around for better insurance rates
Insurance is essential, but it shouldn't break the bank. Get quotes from different providers to ensure you're getting the best coverage at the most competitive rate.
Cancel unused subscriptions
We've all been there—signing up for a free trial and forgetting to cancel. Check your subscriptions regularly and eliminate those you no longer use. Every little bit saved adds up!
Reduce utility usage
Your parents didn't tell you to turn off the light for nothing. Lower your energy bills by being mindful of how you use electricity, water, and gas. Simple actions like turning off lights, using energy-efficient appliances, and fixing leaks can save you a lot of money.
Plan meals and stick to a grocery list
Plan your meals ahead of time and create a grocery list to avoid impulse purchases. It’s always a smart idea to visit the supermarket after eating, so you’re not at the mercy of your cravings. This way, you'll buy only what you need, reducing food waste and unnecessary expenses.
Use public transportation or carpool
Save on transportation costs by using public transport, carpooling, biking, or walking whenever possible. These options are not only cost-effective but also environmentally friendly.
Limit dining out and entertainment costs
Reduce spending on dining out and entertainment by cooking at home more often and finding free or low-cost activities. We know it’s hard resisting the temptation of having some delicious meal delivered to your door after a long day of work, but the dollars you save will be worth it!