What are the 3 types of expenses in your budget?
Everyone has a different budget, expenses, and income, but one thing everyone has in common is the three types of expenses they pay.
Fixed, periodic, and variable expenses are the three main categories you should include in your budget as everyone has them.
If you’re wondering what are the 3 types of expenses and how do I make sense of them, then this guide is for you. I’ll explain what each one is, give some examples, and teach you how to manage them in your spending plan.
What are fixed expenses?
Fixed expenses are expenses you always have. They usually occur monthly, and the amount you pay rarely changes. They often include a contract, agreement, or legal obligation to pay them and it may take a little work to get out of them.
A few good examples of fixed expenses are:
- Mortgage or rent payment
- Insurance payments
- Car payments
Fixed expenses are easy to budget for because you know when they occur and for how much. There isn’t any guessing or unpleasant surprises involved. Fixed expenses often take up the largest portion of your budget and they cover the most important expenses (i.e. housing and car expenses).
They are a necessary part of your budget, but there are ways to reduce them so you have room for other expenses too.
How to reduce fixed expenses
Reducing your fixed expenses often has the greatest (and best) impact on your budget and finances. It may take a little work to reduce them, but with consistent effort, you may free up a significant amount of your income each month.
Here are a few ideas to reduce the fixed expenses in your budget:
- Lower your housing payment. This may seem like the most extreme area to change, but it’s probably the most expensive area of your budget too. If you rent, see if you can rent somewhere cheaper when your lease is up. If you own your house, think about refinancing. Before you do, ask yourself – can I get a lower rate and/or better term? Are you paying Private Mortgage Insurance, but could get out of it because you owe less than 80% of your home’s current value? If you can’t refinance, consider downsizing into a smaller home with a more affordable payment.
- Buy a car without a car payment. We all need transportation, but we don’t need the latest model. There are many perfect used cars that will last for many years and save you money on interest and even monthly payments. If you can afford to pay cash for a car, do it and save money on interest. A car is a depreciating asset so you aren’t investing in your future when you have a car payment.
- Shop around for insurance. Make it a habit to shop for insurance annually. Shop for a cheaper house, car, and even health insurance (if your employer doesn’t provide it). If you stick with the same provider for years, your premiums likely increase without you even realizing it.
- Shop for cheaper internet and phone plans. Internet and cellphones are a necessary part of our lives, but you shouldn’t overpay for either of them. Like insurance, shop around for better plans annually (or when your contract is up if you have one). Providers usually have better deals for new customers than they do their existing customers, so take advantage and every few years become a ‘new’ customer to your old providers.
What are periodic expenses?
I like to call periodic expenses the ‘sneaky expenses.’ They are the expenses that creep up on you, even if in the back of your mind you knew about them, you often forget.
Some examples include:
- vehicle maintenance
- an annual membership fee
- property taxes
- annual HOA dues
- semi-annual/annual insurance payments
Any expense that pops up once in a while, and isn’t something you pay monthly, is periodic.
The biggest problem with periodic expenses is they get forgotten. When they come up, it can throw even the perfect budget out the window.
With a little planning, it’s possible to manage even the most unexpected periodic expenses.
How to manage periodic expenses
Periodic expenses often get overlooked because they aren’t ‘in your face’ each month. When you budget, it’s important to include EVERY expense including your periodic expenses.
List the expenses you pay throughout the year. Then figure out how you’ll pay them. One option is to include them in the budget for the month they’re due, but this can cause you to go over budget.
A better way to budget for periodic expenses is to take the amount, divide it by 12 and save that amount each month. Make it a regular part of your monthly budget, almost like they’re a ‘fixed expense’ like those explained above.
So you don’t forget to stash away that cash, set up automatic transfers for the amount you need to save for periodic expenses each month. Transferring the funds to an online high-yield savings account will keep you from spending it and earn you a few bucks too.
If your periodic expenses are variable, meaning you don’t know how much they will be exactly, come up with an average. Pull your bank and credit card statements for the last year or even two years and average the periodic expenses. Divide the total by 12 and budget that amount each month.
What are variable expenses?
Variable expenses are expenses that fluctuate from month-to-month. They may be necessary (i.e. food, electricity, gas for your car) or discretionary (shopping, coffee shop treats, and entertainment).
Whether a variable expense is necessary or discretionary isn’t the issue. The important thing is finding a way to make your variable expenses fit into your budget.
Sure, you could stop going out to eat or avoid shopping for unnecessary items, but you can lower many of your necessary expenses too, just by changing your behavior.
How to budget for variable expenses
Since some of your variable expenses are ‘necessary’, start by figuring out how much room is in your budget for variable expenses. From there, you can narrow down how much money you have for each category.
For example, groceries are a necessity, but you don’t have to overspend on them. Cut your budget down to a manageable point and learn how to make it work. Here are a few ways to slash your grocery bill:
- Only shop sales at the grocery store
- Use coupons or a store’s loyalty program to save more money
- Shop discount grocery stores like Aldi
- Meal plan, make a list, and only buy what’s on the list
- Do your grocery shopping online to reduce spontaneous purchases
Other ways to save and/or budget for variable expenses include:
- Decrease your electricity use in the house by shutting off lights and appliances, not in use
- Plan your clothing spending by shopping clearance sales at the end of the season or shopping sales mid-season
- Cut back on eating out, including bringing lunch to work (leftovers from the night before work great)
- Carpool to work or bike/walk if possible
Forecasting your expenses in retirement
As you get closer to retirement, your expenses may change. At first, they may even be higher than what you pay now, but with careful planning, you can budget your way through retirement too.
I like to think of retirement in a few phases:
- Pre-retirement – In the first couple of years you think about retiring, you may cut down on your hours or retire completely, but work your ‘dream job’ or ‘retirement job.’ During this phase, you may have enough income to keep the budget you’ve had before. It’s ideal if you don’t have a mortgage, car payment, or high-interest debt at this point, but if you do, work to get out of it.
- Early retirement – When you stop working, life changes drastically. You may want to explore everything life offers you at this point – traveling, participating in hobbies, or just enjoying life nearby. Your expenses may creep up in this phase, which is why getting out of as much debt as possible before then is important.
- The heart of retirement – After the ‘newness’ wears off and you settle into your new life, things settle down. You probably won’t have as many discretionary expenses, and if you did it right, you should be completely out of debt. At this point, your health insurance premiums may increase and/or your medical expenses increase, which makes it important to clear your budget for them.
Final thoughts on the 3 types of expenses
Creating a budget that not only works for you but also puts your money to its best use is important. Knowing the answer to what are the 3 types of expenses I need to account for is the first step to creating a successful budget.
As life changes, especially as you near retirement, adjust your budget. For example, if you pay off your mortgage, don’t take on another large expense. Instead, allocate the funds to your retirement account or emergency fund. If you have to increase an expense out of necessity, adjust in other areas so you don’t find yourself living outside your means and leaving little money for retirement.
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