What's the difference between fixed and variable expenses?
In accounting, there are only two types of cost: fixed and variable. Whether you're creating a personal budget or planning for a home business, it's important to understand how each type of expense affects your finances.
No accounting degree? No problem. Keep reading this guide to learn all about fixed expenses and variable expenses, including what you can do to keep your expenses low so your bottom line is beautifully high.
What is a fixed expense?
Fixed expenses are expenses that stay the same from one billing period to the next. Imagine if your landlord charged you $1,200 one month, $1,500 the next, and then $1,300 the month after that. You'd never know what to expect.
With a fixed expense, you know exactly how much you'll have to pay. This makes it easier to budget your money and make sure you have enough on hand to cover your living expenses.
Examples of fixed expenses
A fixed expense is usually due at the same time each month, quarter, or year. Rent and mortgage payments are some of the best examples of fixed expenses. Pretty much no one enjoys paying them, but they're going to show up whether you like it or not.,
If you have a car payment, that's also a fixed expense. You have to hand over the money on a specific day each month, and you owe the same amount every time. Your budget may also include these fixed expenses:
Car insurance premiums
Home/renter's insurance premiums
Real estate taxes
Installment loan payments
Student loan payments
Tips for reducing fixed expenses
What makes fixed expenses different from variable expenses is that it's a little more difficult to reduce them. Once you sign up for a car loan, for example, there are only a couple of ways to reduce the amount you owe each month. You can either pay off the loan early or sell the car and buy something with a lower payment.
What you can't do is call the auto financing company and ask them to change your payment from $300 per month to $200 per month. Well, you can try, but don't be surprised if the person on the other end of the phone starts laughing.
Just because it's difficult to reduce your fixed expenses doesn't mean it's impossible, though. If your expenses exceed your income or leave you with very little left over each month, there are a few ways to open some up room in your budget.
You can't negotiate a lower car payment once you've taken out the loan, but you can haggle with certain companies to reduce how much you owe. Cable is a great example. Many companies offer discount packages, which can help you slash your expenses and keep more of your money in your pocket.
The trick is to call the cable company regularly. They're not going to call you and beg you to save money. You have to do the leg work and make your case to the customer service rep. Pro tip: try asking very, very nicely.
Take advantage of favorable payment terms
In some cases, it's possible to save money by paying a bill early or taking advantage of other favorable payment terms. Many cities and counties offer a small discount to homeowners who pay their property tax bills a little early, for example.
If you have federal student loans, you may even qualify for an income-based repayment plan. This type of payment plan is designed to reduce your monthly payment, giving you a little more breathing room. Income-based repayment plans are especially helpful when you're just starting out in the working world and don't make a lot of money yet.
Another way to reduce your fixed expenses is to switch companies. If your cable company is constantly raising its rates and won't negotiate with you, look for another cable provider. You may qualify for a new-subscriber discount, saving you even more money.
Switching companies also works well if you're trying to reduce your insurance costs. Insurance providers offer all kinds of discounts to attract new customers, but they're sometimes not as concerned about keeping current customers happy. Think of them like someone who goes all-out on a first date and then stops making an effort once you're in a serious relationship.
If you ask for a discount and your insurance company won't budge, it may be time to find a new provider. Switching to another company may help you qualify for reduced premiums and other sweet perks.
What is a variable expense?
The definition of a variable expense is right in its name. It's an expense that varies from month to month, quarter to quarter, or year to year. These expenses are a little more difficult to budget for because they're always changing.
One of the best examples of a variable expense is grocery costs. Unless you buy exactly the same items every week at a magical grocery store where the prices never change, your bill is always a little different.
Grocery costs depend on many factors, including what you're planning to cook for dinner each week and whether you expect any guests. Your costs may also go up any time there's a special occasion, such as a holiday meal requiring a big turkey and all the fixin's.
Another good example of a variable expense is all the items you use to keep yourself looking good. People generally don't spend the same amount of money every month on shampoo, eye shadow, hair gel, moisturizer and other personal care products. Their costs go up and down depending on their changing needs.
These are just a few other examples of variable expenses:
Tips for reducing variable expenses
If you don't have much wiggle room in your budget, take a look at your variable expenses. You may not be able to eliminate them completely, but you can reduce them.
Not everyone can afford to give up a paid-off vehicle and switch to something more fuel-efficient. If you'll be driving the same car for the foreseeable future, here are a few ways to reduce your gasoline costs:
Instead of running one or two errands every day, make one trip per week to reduce the number of miles you drive.
Check to see if your favorite grocery store offers gasoline discounts for loyal shoppers. You may be able to earn discounts simply by purchasing groceries every week.
Pay with cash instead of a credit or debit card. Gas stations usually charge a little less for cash transactions.
Find out if your favorite gas station has a loyalty app. If it does, download it and use it to earn discounts.
Avoid speeding. At high speeds, increased wind resistance reduces fuel efficiency. You won't be burning rubber—you'll be burning gas.
Keep your tires inflated to the right pressure.
One of the easiest ways to reduce the cost of restaurant meals is to eat at home instead. If you just can't give up your favorite sushi or pho, try reducing the number of restaurant visits you make each month. Before you visit a restaurant, look for coupons or download the restaurant's app to see if there are any special offers available.
Just because you go to a restaurant doesn't mean you have to get the most expensive thing on the menu. To save money, skip the appetizer or drink water instead of pricey beverages.
You don't need to walk around in worn-out shoes and faded shirts just to save money on clothing. A few smart decisions can help you save big bucks without cramping your style.
If you absolutely love an expensive brand, use resale sites to pick up brand-name items at a fraction of their original cost. Sites like Poshmark, Mercari, and eBay have listings for jeans, dresses, shirts, shoes, handbags, and everything in between. You may even be able to find brand-new items with the tags still on them.
Another way to save is to wait for sales or look for coupons before you shop for clothes. When you find a good deal, promise yourself that you won't buy a bunch of other items when you go to the store to take advantage of it.
If you're really trying to cut costs, get comfortable using a needle and thread. In many cases, it's possible to repair well-loved items instead of replacing them with new ones.
Even if you have health insurance, it can be expensive to visit a doctor, have blood tests, or receive treatment in a hospital. You can't always avoid these expenses, but there are a few ways to limit your costs.
First, get to know your health insurance policy inside and out. If you know exactly what's covered, you'll be less likely to end up with surprise medical bills in your mailbox.
Careful planning is another good way to save money on health care costs. If you need a procedure that costs several hundred dollars after insurance, try scheduling it for the beginning of the year. You'll knock out your deductible a bit faster, leaving you with fewer out-of-pocket expenses to worry about as the year goes on.
Finally, make sure you choose in-network doctors and hospitals. In-network providers have agreed to accept the reimbursement rates offered by your plan. If you don't use an in-network provider, you may have to pay a much larger percentage of the bill on your own.
Fixed vs. variable expenses in your home business
If you have a home business, you may have additional fixed and variable expenses. Common fixed expenses include loan repayments, business insurance policies and equipment leases. If you lease a photocopier instead of buying it, for example, that's a fixed expense.
Some of the most common variable expenses include office supplies, raw materials, credit card fees, and shipping. The amount of each expense varies based on business volume. For example, the more products you ship to customers, the higher your shipping costs will be.
Is advertising a fixed cost?
Even though advertising expenses go up and down, advertising is still considered a fixed business expense. This is because sales volume and production levels have nothing to do with your advertising costs. If a magazine charges $500 for ad space, you pay the same $500 whether your business generates $5,000 or $500,000 per month in sales.
Frequently asked questions
Is one type of expense more important than another?
Fixed and variable expenses are both important. Fixed expenses get more attention because it's difficult to change them and they're typically due at the same time each month, quarter, or year.
What type of expense is rent?
Rent is a fixed expense. You pay the same amount of money each month until your lease runs out or you and your landlord negotiate new terms.
Why is it important to manage your expenses carefully?
Careful management of your expenses makes it easier to live within your means. If you're having trouble saving or even making ends meet, trimming expenses can help you get your head above water.
Fixed expenses are relatively stable. It's difficult to change them unless you negotiate new terms or switch providers.
Variable expenses change regularly.
If you have a home business, you may have additional expenses, such as web hosting or business licensing fees.
Managing your expenses carefully can help you improve your financial stability.
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