Fixed vs Variable Expenses: What’s the Difference?

In terms of your personal budget, spotting fixed expenses should be fairly easy. They are paid on a regular basis whether it be monthly, quarterly, annually or some other pre-arranged schedule. Next time you view your bank and credit card statements, highlight all the fixed expenses and their respective amounts. To manage your fixed expenses, you need to create a budget and track your spending. Determine how much you can realistically afford to spend on each fixed expense every month.

The breakeven analysis also influences the price at which a company chooses to sell its products. Fixed costs tend to account for a larger percentage of most people’s budgets, but that doesn’t mean variable costs are any less important. Many variable costs are essential budgeting items, such as food and electricity. Nothing in your personal budget should ever be looked at as permanent. Permanence and budgeting don’t go hand in hand especially for those looking to achieve financial independence.

How Do Fixed Costs Differ From Variable Costs?

But the amount you pay in any given month could be different from previous payments or ones you’ll make in the future. While they may not be necessary for basic needs, certain recurring subscriptions could also be included as fixed expenses in your budget. If you pay for a gym membership or streaming services, for example, those costs might stay the same month to month. Since fixed costs are not related to a company’s production of any goods or services, they are generally indirect. These costs are among two different types of business expenses that together result in their total costs. With the envelope budgeting system, you’ll divide your income into several categories, such as bills, groceries, gasoline, and entertainment.

Your utility bills may also be variable expenses because they may change from month to month. For example, you might spend more on electricity in July than you do in December because of air conditioning. The upside of having variable expenses in your budget is that you have more control over them than you do with fixed expenses. For example, saving money on renter’s insurance, homeowner’s insurance or car insurance may be as simple as shopping around for a better deal with a different insurer. Saving money on housing, on the other hand, might require you to move or refinance your mortgage. Fixed costs are expenses that a company pays that do not change with production levels.

Are We Really Headed for a Cashless Society?

Saving can also be considered a fixed expense if you’re budgeting for it regularly. For instance, you may put $100 into your emergency fund every payday. If you do that consistently and include it as a line item in your budget, you may technically consider it to be a fixed expense if you don’t deviate from your savings habit. Another type of expense is a hybrid between fixed and variable costs. Semi-variable costs are composed of both fixed and variable components, which means they are fixed for a certain level of production.

You can then set aside that amount each month for each variable expense. If you want, you could even open separate savings accounts for each variable expense category. This could help you clearly see how much you have left to spend on each category every month. It could also turn variable expenses into expenses you can anticipate and budget for each month, just like your fixed expenses. 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.

• If you like where your fixed expenses are at, then perfect, just leave them alone.
• The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
• Finally, any cash paid for the expenses of fixed costs is shown on the cash flow statement.
• With debt repayment, you may be able to save by refinancing or consolidating bills.
• Any costs that would remain constant, even if have zero business activity, are fixed costs.

As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices. Variable expenses can include essential expenses as well as discretionary spending. For instance, if you get sick, then a doctor visit may be a necessity that you need to cover. On the other hand, a discretionary expense means anything you budget money for or spend money on that you don’t necessarily need. Knowing how to include both in a budget is important to avoid overspending.

Breaking Down Fixed Costs

The gasoline used in the drive is, however, a sunk cost—the customer cannot demand that the gas station or the electronics store compensate them for the mileage. Every day, you must make many decisions about whether or not to purchase certain items or take part in particular events. Variable expenses can be used to fund discretionary activities such as dining out at restaurants, Starbucks, or golf.

The variable costs might include expenses but also debt repayments and savings. Most of your fixed expenses are inescapable — you can’t exactly cut your house or car payments. However, you may be able to eliminate a few unnecessary fixed expenses. Those fixed monthly subscription services — Netflix, Spotify, Hulu and more — can really add up, so you might consider cutting some of them. Additionally, there may be opportunities to lower them by comparing other options.

Fixed Costs: Everything You Need to Know

But these costs can fluctuate from month to month, depending on your usage and the rates your provider charges. Period expenses are those costs that are repeated often, but not every month. You need to plan and budget to be able to pay these expenses consistently. If you like where your fixed expenses are at, then perfect, just leave them alone.

So, if you are consistently overspending in one area, you may want to cut back or find other ways to reduce spending. Regardless, managing fixed and variable expenses can help you reach your financial goals effectively. For instance, someone who starts a new adp benefits business would likely begin with fixed expenses for rent and management salaries. All types of companies have fixed-cost agreements that they monitor regularly. While these fixed costs may change over time, the change is not related to production levels.

Budgeting Tips

Unfortunately, variable costs are also some of the toughest expenses to cut back on, because doing so requires a daily commitment to frugal decision-making. An analytical formula can track the relationship between fixed cost and variable cost in management accounting. It is important to know how total costs are divided between the two types of costs. The division of the costs is critical, and forecasting the earnings generated by various changes in unit sales affects future planned marketing campaigns. Fixed expenses are important to track because they can have a big impact on your budget.

Instead, you may budget for those kinds of variable expenses using sinking funds—money that you set aside for this purpose. Budgeting for variable expenses can be more challenging, as you may not be able to pinpoint exactly how much they’ll add up to from one month to another. If you’re not tracking variable expenses regularly, it could be very easy to under- or overestimate how much of your budget you should allocate to them. This is something you can easily do with a budgeting app, however, which can minimize the odds of variable expenses sideswiping your spending plan. Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments.

Unlike fixed costs, variable costs (e.g., shipping) change based on the production levels of a company. Unlike fixed costs, variable costs are directly related to the cost of production of goods or services. Variable costs are commonly designated as the cost of goods sold (COGS), whereas fixed costs are not usually included in COGS. Fluctuations in sales and production levels can affect variable costs if factors such as sales commissions are included in per-unit production costs.

We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. I’m a freelance financial journalist and a regular contributor to U.S. I’ve written for Life + Money by Citi, Bankrate and The Balance, among others. You can find me on LinkedIn or follow me on Twitter @seemomwrite. This website is using a security service to protect itself from online attacks.

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. If you’re looking for ways to save money each month, start by finding ways to cut down on both your fixed and variable expenses.