The Difference Between Fixed Expenses and Variable Expenses

These fixed expenses occur repeatedly and typically can’t be dropped with a moment’s notice, should your financial situation change. Therefore, it is essential to make sure that your fixed expenses are as low as possible, allowing you ample funds for variable costs that are often harder to control and savings. Fixed costs should take up no more than 50% of your income to make sure that you have enough breathing room in your cashflow. On the other hand, some variable expenses are much easier to adjust in a pinch. If an emergency expense comes up and leaves you short on cash for the month it can be difficult to reduce fixed expenses like car or rent payments to make ends meet.

Not all variable expenses are discretionary expenses, however. As a rule of thumb, here’s how to budget for fixed and variable expenses. Fixed expenses are costs that typically remain the same in price and frequency, while variable expenses are costs that can change regularly.

Typical fixed expenses include car payments, mortgage or rent payments, insurance premiums and real estate taxes. On the plus side, they’re easy to budget for because they generally stay the same and are paid on a regular basis. Some fixed expenses may be discretionary, like a gym membership or streaming service subscription. Knowing how much money you spend per month on fixed and variable costs is essential to staying operational and profitable. Whether you want to create a tighter budget, build up a cash reserve, or increase your cash flow, getting a more detailed picture of your fixed and variable expenses can help. The upside of having variable expenses in your budget is that you have more control over them than you do with fixed payments.

What Are Fixed Expenses?

If you are not sure where to start, consider using a budgeting app or tracking your expenses in a spreadsheet. It makes up a large part of most people’s budgets, so it is important to be aware of how much you spend on these expenses each month. Fixed expenses can be used to calculate several key metrics, including a company’s breakeven point and operating leverage. Upwise is a product of MetLife Consumer Services, Inc. (MSC). Upwise is available at no cost to all individuals and regardless of any MetLife relationship or product. Each individual is advised to consult with their own attorney, accountant, and financial professional regarding their specific circumstances.

• When you lower your fixed expenses, you automatically save more money each month or pay period.
• Prior to joining JPMorgan Chase, she worked for the United States Olympic Committee.
• Budget for essential expenses first, such as housing, car payments and child care.
• Part of that zero-based budget includes those fixed costs that happen month after month.
• For example, you can search for a less expensive phone or internet plan and drop subscription services you no longer use or can live without.

The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest. A financial advisor can help you put a financial plan together for your future. Overall, a large part of budgeting is determining the difference between wants and needs. The best way to do this is to remember that needs are the things you can’t live without, while wants are things you enjoy but aren’t necessary to your daily life. California loans made pursuant to the California Financing Law, Division 9 (commencing with Section 22000) of the Finance Code. All such loans made through Lendio Partners, LLC, a wholly-owned subsidiary of Lendio, Inc. and a licensed finance lender/broker, California Financing Law License No. 60DBO-44694.

For personal budgeting purposes, fixed expenses are the costs that you can forecast with confidence because they don’t change from month to month or period to period. They tend to take up the largest percentage of your budget because they are things like rent or mortgage payments, car payments and insurance premiums. Variable expenses, on the other hand, are hard to know before you incur them. You can estimate them, but there is the possibility that they will be higher or lower than what you anticipated. As these examples show, although discretionary spending is often a variable expense, variable expenses can be necessities too. With the zero-based budgeting approach, every dollar is allocated toward a purpose.

Want More Helpful Articles About Running a Business?

We refer to any expense a company faces when producing its products or performing its services as a “cost”. This is the amount of money that businesses invest in buying and selling goods. Variable and fixed costs are the two primary categories of expenses businesses have when producing goods. Any fixed costs on the income statement are accounted for on the balance sheet and cash flow statement.

Take time to review all your insurance policies, recurring monthly expenses, and subscriptions. This can help you add big savings to your fixed monthly budget. Although variable costs are quite often discretionary expenses, some may be necessities. Buying gas for your car each month is a variable expense, as are car repairs and maintenance. Your utility bills may also be variable expenses because they may change from month to month.

Begin by tracking all of your sources of income and allocating an appropriate amount of money towards your fixed expenses each month in order to stay on track with your financial goals. Variable expenses are any expenses a business has that connect to the volume of products or services it produces. Variable costs fluctuate with an organisation’s production volume.

You still have the power to negotiate prices and explore alternatives in certain cases. For example, you might be able to lower your cable bill, save on car insurance or refinance your student loans. If you’re spending more on fixed expenses than you prefer, consider canceling the services you don’t need and revisiting the ones you do.

Budgeting for fixed vs. variable costs

For example, you might spend more on electricity in July than you do in December because of air conditioning. When it comes to budgeting for fixed and variable expenses, fixed expenses tend to be easier to plan for, since they are typically due at set times. Variable expenses are less consistent, making them harder to plan for in advance. If you’re like most people, your budget is comprised of both fixed and variable expenses. How do they differ from necessities vs. discretionary spending?

EveryDollar will automatically copy it over for the next month. Fixed expenses are simple to spot once you know what to look for. However, you might not know how much money you’re putting toward them collectively, and if that amount fits into your budget. Track your spending by using a spreadsheet or app, or by looking at your bank statement. Many budgeting apps and bank websites will highlight your recurring expenses or break down your transaction history by category. Then you can tally your fixed costs to see what portion of your monthly income goes to them, and how much is left for other expenses.

If you significantly overestimated or underestimated, adjust your budget accordingly so it’s more accurate. The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site.

Ways to Reduce Fixed Expenses

Your mortgage or rent, car payment, and insurance are examples of fixed expenses. They may vary slightly from year-to-year (say, a rent increase) but overall you can count on them to stay the same for at least a year at a time. Fixed expenses are those costs that remain the same each month regardless of any changes in your business. They are not affected by fluctuations in sales or production, and they remain constant. Fixed expenses are essential to running a successful business as they make budgeting easier and help you to plan ahead.

A fixed expense is a necessary, ongoing cost that does not fluctuate with changes in production or sales volume. It is “fixed” in the sense that it remains the same even when business conditions change. The most common examples of fixed expenses are office rent, utilities, and insurance. Reviewing your fixed expenses will significantly impact how much you can save each month because they make up most of your spending.

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Fixed costs on the balance sheet may be either short- or long-term liabilities. Finally, any cash paid for the expenses of fixed costs is shown on the cash flow statement. In general, the opportunity to lower fixed costs can benefit a company’s bottom sales journal line by reducing expenses and increasing profit. Fixed costs are allocated in the indirect expense section of the income statement, which leads to operating profit. Depreciation is a common fixed expense that is recorded as an indirect expense.

• If you’re signed up for a monthly service that you rarely use, there may be an alternative plan with a lower price.
• Stop letting this tsunami of predictable-yet-somehow-unexpected expenses sink you.
• Additionally, Kristi is a member of the Board of Trustees for The American College of Financial Services.
• He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
• For things you know are going to come up at least once a year, set aside a little bit each month to cover the cost.
• For your fixed expenses, all you have to do is make a line item with the name (like Rent) and amount ($1,200).

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. There are many ways to save for retirement, and most employers offer matching contributions to their employees’ 401(k) plans. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. CreditWise Alerts are based on changes to your TransUnion and Experian® credit reports and information we find on the dark web. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

For help with budgeting sign up for Bankrate’s myMoney to categorize spending and identify ways to cut expenses. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When making a budget, it’s important to know how to separate fixed expenses from variable expenses.

Apply for financing, track your business cashflow, and more with a single lendio account. Find out the most common expenses to budget for as a dog owner. We all love a good coffee shop—but not those coffee shop prices. A 16-ounce Americano can often cost you over $5, and when you’re hitting up that drive-thru more than once a week . Instead of drinking your money away, brew your beans at home and save the coffee shop for special occasions.