What are the 3 types of expenses in your budget?
If you want to learn to budget properly, there are 3 types of expenses you should familiarize yourself with.
The 3 types of expenses most people need to budget for are fixed, variable, and periodic.
Fixed expenses are consistent and predictable amounts, and often paid monthly. Variable expenses are irregular costs that can usually be adjusted within a budget. Finally, periodic expenses are expected but infrequent, and typically occur on a quarterly, semi-annual or annual basis.
In this post, I’ll go into detail about 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. Of the three categories of expense, these are often attached to a contract, agreement, or legal obligation.
A few good examples of this type of expenditure are:
- Mortgage or rent payment
- Vehicle insurance payments
- Car payments
Fixed expenses are easy to budget for because you know the actual payment of each and when they are due. They aren’t irregular expenses, so 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 personal expenses too. To find out your fixed expenses, just look at your bank transactions from the previous month.
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 lower them, but with consistent effort, you may free up a significant amount of your ordinary 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 gently used cars that would 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 around for a lower house, car, and even health insurance premium (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. If you find a cheaper carrier, you can often go back to your original provider later at a lower rate.
What are variable expenses?
Variable expenses are irregular expenses that fluctuate from month-to-month. They may be necessary (i.e. food, electricity, gas for your car) or discretionary (clothing, coffee shops, and entertainment).
Whether a variable monthly expense is necessary or discretionary isn’t the issue. The important thing is finding a way to make your variable costs fit into your budget.
Of course, you can stop going out to eat or avoid shopping for unnecessary items. But, you can also lower many of your necessary expenses as well, simply by adjusting your financial decisions.
Some examples of variable expenses are:
- Vehicle maintenance costs
- Parking fees and tolls
- Restaurant dining and coffee shops
- Clothing, shoes & accessories
- Movie theaters & concerts
How to budget for variable expenses
Since some of your variable costs are necessary, start by figuring out how much room is in your budget for these actual expenses.
From there, you can narrow down how much money you have for each category assigned to these irregular expenses.
For example, groceries are a necessity, but you can determine how much you want to spend. By using coupons, shopping sales, and creating meal plans, you can easily cut your food expenses down to a manageable point.
If you often go over budget, start by analyzing your variable expenses. Many times, they are the easiest to reduce.
Here are a few other ways you can budget for variable costs:
Lower your electricity bill by shutting off lights and appliances that are not in use. You can also put timers on your switches, which really helps with forgetful kids!
Turn off ceiling fans when you’re not in the room, because they don’t actually help to cool down the temperature.
Also, adjust your thermostat by a few degrees to save money.
Plan your clothing budget by shopping clearance sales at the end of the season or shopping sales mid-season.
Get on the email list of those stores where you shop frequently, so you know when sales are happening.
Always browse the clearance and discount racks. You might just find what you’re looking for at a great price.
Also, ask the butcher at your local grocery store when they typically price down meat. This way, you’ll know when to go shopping to get the best deals.
If you can cut back on eating out, you could potentially save a lot with your variable expenses. Think of all the occasions when you pay for someone else to make your food. This could be work lunches, school lunches, fast food, coffee shops, or restaurant dining.
These food bills add up fast, and can take a huge chunk out of your monthly budget. By creating meal plans at home and keeping your fridge and pantry stocked, you’ll be able to lower this variable expense considerably.
With a little planning, you could reduce the amount of gas you put in your tank every month.
See if you can carpool with co-workers a few times a week, or split driving duties with neighbors when getting your kids to school.
If you live in the city, take public transportation (which can be cheaper than gas sometimes!). For shorter distances, you could even bike or walk instead.
You could also sell that gas guzzler and swap it out for a fuel-efficient vehicle.
What are periodic expenses?
I like to call periodic expenses the ‘sneaky expenses.’ Even though they are expected, they can creep up on you because it’s easy to forget about them.
Some examples of this type of expense include:
- annual registration fees
- property taxes
- annual HOA dues
- semi-annual/annual insurance payments
Any non-recurring 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 non-recurring 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.
Here are some smart tips to plan for periodic expenses:
Know what they are
Make a list of all of your non-recurring, periodic expenses over the course of one year.
Write down the due dates for each one, or put them on a calendar.
This way, you won’t be caught off guard when you get the bill in the mail.
Save in advance
A smart way to budget for periodic expenses is to save for these bills in advance. Simply take the amount, divide it by 12 and set aside that amount each month.
Make it a regular part of your monthly budget, almost like they’re a ‘fixed expense’ like those explained above. You could keep them in a dedicated sinking fund so you have the money when they come due.
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.
Forecasting major types of 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:
In the first couple of years when you think about retiring, you may decide to cut down on your hours at work. Or, you might choose to retire completely, but continue to generate income with a side gig or part-time work.
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.
When you stop working completely, life changes drastically. You may want to explore everything life offers you at this point – traveling, trying new hobbies, or just enjoying a leisurely schedule.
Your expenses may creep up in this phase, which is why getting out of debt as much as possible before then is important.
The fewer fixed expenses you have, the better. You should try to have your mortgage paid off by this phase, so you’re not weighed down with the burden of such a big debt.
Heart of retirement
After the newness of retirement wears off and you start to get used to 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 and medical expenses will likely 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 3 types of expenses you need to account for is one of the first steps to creating a successful budget with your personal finances.
As life changes, and especially as you near retirement, adjust your budget. For example, if you pay off your mortgage, then 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.
When you learn how to manage and reduce the 3 types of expenses – fixed, periodic, and variable – you’ll set yourself up for greater financial security.
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