Fixed Expenses: What You Need to Know
7 MIN READ
Published August 15, 2023 | Updated September 11, 2023
Fixed expenses are bills that stay the same each month, such as rent and insurance. Variable expenses like grocery bills and gas fluctuate monthly. Cutting costs on fixed expenses can help you save more money if you're willing to budget and make frugal choices.
What Are Fixed Expenses?
Knowing how to differentiate between fixed and variable expenses is important when making a budget. These are typically costs that stay the same month-to-month. Variable expenses are bills that can go lower or higher from one month to the next.
Whether your goal is to stop overspending or get better at money management, knowing how to budget for both types of costs is important. It can help you determine how much to spend on your needs, wants, debt repayment, and savings.
Defining Fixed Expenses
Now that you have a general idea about what fixed expenses are, let’s get into the details of what they mean. Any costs that you can confidently forecast because they don’t change from one month to the next are known as fixed expenses. These costs are typically the largest part of your monthly budget because they cover things like mortgage debt payments, insurance premiums, and car payments.
Fixed expenses are paid at fixed intervals, such as weekly, monthly, quarterly, or yearly. Knowing how often you need to pay the bills can make budgeting easier.
Examples of Fixed Expenses
Some of the most common fixed expenses that you are likely paying include:
- Mortgage payments or rent
- Insurance premiums
- Car payments
- Student loan payments
- Internet and phone services
- Property taxes
- Childcare costs
Calculating Fixed Expenses
Now that you know what fixed expenses are, let’s talk about how to calculate them for budgeting. Fixed expenses are easy to spot if you know what you’re looking for. It’s important to find out how much money you spend each month on all your fixed expenses to determine your monthly budget.
Use an app or a spreadsheet to make it easier and simpler to track your spending. Another smart way to identify and calculate your fixed expenses is to look at your bank statement each month to spot expenses that stay the same. Many banks and budgeting apps will also highlight your transaction history and break it down by fixed expenses vs. variable expenses. You can then tally your fixed costs to see how much is left each month for other expenses.
Difference Between Fixed and Variable Expenses
You’ll have both fixed and variable expenses each month, so it’s important to distinguish between the two and make a budget accordingly. Here are a few key differences between fixed and variable costs:
- Fluctuation: Variable expenses fluctuate month-to-month, while fixed expenses remain the same over a period of time. Some common examples of variable expenses are groceries, gas, shopping, and entertainment.
- Needs vs. Wants: Most variable expenses cover discretionary expenses such as dining out, entertainment, and shopping. Most fixed expenses, on the other hand, are “needs” such as housing and car payments.
- Essential Bills: Some variable costs can also represent “needs.” For example, heat and electric bills. You’ll spend a variable amount on these expenses each month, but they’re still for necessities.
- Fixed Costs: Similarly, not all fixed expenses are for necessities. For example, you’ll spend the same amount each month on subscriptions, gym membership, and streaming services, but these are wants and not needs.
Impact of Fixed Expenses on Financial Planning
A financial plan can help you achieve your goals, whether it’s to get out of debt, save for a down payment, or put aside retirement savings. Knowing what your fixed expenses are and how they impact your monthly budget is the first step in creating a plan that helps you achieve those goals. You can also consult with a personal finance expert to create a personalized plan for your finances.
Importance of Managing Fixed Expenses
When creating a financial plan, take a look at your monthly expenditure and look for ways to reduce your fixed expenses. Managing the amount you spend on mortgage, rent, and car payments will ensure that you’re not overspending and you have enough money left over for discretionary spending and saving.
Reducing your fixed expenses is possible, but it can take time to make those adjustments. For example, if you want to reduce the amount you spend on rent, you’ll need to find a cheaper home or take on a roommate. This may involve lifestyle adjustments, and you may need to wait until the end of your lease to make those changes.
How To Reduce Fixed Expenses
Fixed expenses are not always set in stone. Since this is likely to be the biggest portion of your budget, any money you are able to save in this category can make a huge difference to your overall expenses. Additionally, you’ll only need to spend a few hours shopping around for a less expensive internet plan or insurance premium. Once you’ve made the switch, keeping your bills lower won’t take any additional effort.
Teresa Dodson, debt expert and Founder of Greenbacks Consulting, offers this advice: “Controlling fixed costs is just as important as your fixed expenses. Every year, make it a point to shop around and compare prices on insurance, electricity, cell phone service, etc.” Dodson notes that in most cases, you’ll find a lower price elsewhere or get reduced rates from your provider so they can keep you as a client.
Here are a few more ideas for reducing your fixed expenses:
- Consider downsizing, refinancing, or living with a roommate to reduce your mortgage or rent.
- For debt repayment, consider debt consolidation through a cheaper personal loan or a 0% balance transfer credit card to save money on interest rates. Debt settlement is another option if your credit scores are not high enough to qualify for a personal loan or a credit card.
- Review your subscriptions and memberships to see if you can cancel those that you don’t use regularly.
Fixed Expenses in Budgeting
Forgetting to plan for your fixed expenses or not budgeting for the right amount can be a big mistake. A considerable portion of your gross or net income will go towards these items each month, so it’s crucial to account for them correctly.
Fixed Expenses Within a Budget
Fixed expenses are typically easier to budget for because they are due at specific intervals. The amount you spend on them also remains fixed.
A major part of budgeting is differentiating between your wants and needs. Make a list of things you can’t do without and those that aren’t necessary for daily life. For example, fixed costs like insurance and mortgage payments are needs, while expenses like subscriptions are wants.
If you're following the 50/30/20 budgeting rule, 50% of your monthly income should be allocated for your needs, 30% should go towards wants, and 20% should go towards savings. Most of your fixed expenses are essentials, so it’s important to prioritize them first in your budget. Many people also prefer to have separate bank accounts for their needs, wants, and savings.
Balancing Fixed and Variable Expenses
The key to balancing your fixed and variable expenses is by tracking expenses and adjusting as needed. Prioritize your needs in your budget, which are usually fixed expenses like a mortgage, car payments, utility bills, and insurance. Review how much money is left, and then adjust your variable expenses to fit your budget.
Plan for expenses in advance. For example, if you know that your insurance premium will go up in a few months, make sure you have enough room in your budget to accommodate it.
Create an emergency fund to save money for unexpected expenses like car repairs. Look for categories where you are consistently overspending so you can find ways to cut back. Ideally, you should have 20% of your monthly income left after all your expenses to allocate toward saving and investments.
The Bottom Line on Fixed Expenses
Knowing what fixed expenses are and how they are different from variable expenses is a crucial part of keeping your budget on track. Start by taking a look at your bank statement for the last few months to determine your fixed and variable expenses and find ways to eliminate unnecessary spending. Pay off credit card debt and any other debt obligations you currently have to free up more money to save for your financial goals.
If your monthly budget is negatively impacted due to an overwhelming debt of $10K or more, TurboDebt can help. Our team can assist you in determining which debt relief method is right for you. Take advantage of our free consultation to see how we can help you find the right debt relief option for your needs.