Financial Management Tip 7: Understanding your Fixed and Variable Expenses

Financial Management Tip 7: Understanding your Fixed and Variable Expenses

There are two distinct parts of everyone’s budget are 1. Fixed Expenses and 2. Variable Expenses 

1. Fixed Expenses: Cost the same month to month such as your mortgage or rent payment, car or house insurance (if paid monthly). These typically can not be easily changed. These are easy to track within your budget.

However, if you were in a financial crunch you might be able to change your mortgage payment by re-financing or renting out a room or basement for extra income. If you rent you could move to a cheaper apartment or get an extra room-mate.

You can shop around for cheaper car, house, and life insurance- do your research and look for discounts.

Fixed doesn’t mean set in stone, however, in general the costs are pre-determined on a monthly basis and there isn’t a lot of flexibility with these bills. Look at reducing these costs in order to

**Cell phone bills and cable bills are somewhat fixed – Do you consistently spend over your allotted minutes every month or order a movie on the tv? If so maybe look at a new contract/plan that better meets your needs and allows you to budget an appropriate amount.

2. Variable Expenses: These costs vary from month to month and are under your control. You decide what to spend on food, eating out, entertainment, clothes, coffee, among other budget categories.

Some of these categories are necessities like food; while others are discretionary. Variable costs require you to track them carefully. For example, one month you might spend $150 eating out at restaurants while the next month you might spend $300.

*** The easiest way to track even variable categories is to pre-determine what you can afford to spend each month in each category. I like to get this money out in cash and divide it among jars or envelopes for each category. When money is taken out from the food jar, the change and a receipt go back in the jar.

You can definitely cut back in this category but it requires discipline, hard work, and the ability to make decisions about your priorities.

**Heat bills can vary from month to month. Some companies will over a plan which standardizes your bill from month to month so you can budget properly. I actually use the highest bill amount for the year as the number in my budget so that in some months I am under considerably and use this under-spend for extra debt repayment or it goes into my savings account.

 We must not forget to look at savings as being an important category in our fixed expenses and debt repayment.

The two important categories of any budget are variable and fixed costs and it is important to recognize that both parts can be trimmed when needed.