Fixed vs Variable Costs in Your Personal Budget

After over ten years of writing about personal finance, I find myself circling back to the basics. And uncovering some areas of those basics — for example, the topic of budgeting — where I could go even deeper and get even more granular. This post is the fruit of my circling back and wondering, “What did I write about budgeting that may need further explanation to true novices?” When it comes to discussing fixed vs variable costs, many may think of it in terms of accounting terminology, but it is incredibly important to know these terms when it comes to personal budgeting, too.

After getting laid off earlier this year, one of the first things I did in my panic to try to cut expenses as much and as quickly as possible was circle back on those expenses — which ones I could cut and live without, and which ones I would have to continue to pay while I began the search for new employment. Even though I'm working full-time in real estate now, having a handle on my fixed vs variable expenses helped me financially survive a really strange time.

What are fixed vs. variable costs?

Fixed costs are expenses that remain constant; costs do not change in the short term and are typically incurred regularly. Examples of fixed costs in personal finance include rent or mortgage payments, utilities like water, gas, electricity, internet, insurance premiums, debt minimums, childcare payments, and more.

Fixed expenses are necessary for maintaining a certain standard of living and are often paid on a monthly basis.

Variable costs, on the other hand, fluctuate in direct proportion to the level of production or sales. These costs are not fixed and can change over time. Examples of variable costs in budgeting and personal finance include utility bills, groceries, transportation expenses, and entertainment costs. These expenses are directly influenced by personal choices and can (and do!) vary from month to month.

How do fixed vs variable costs work in a personal budget?

95% of personal budgets operate on a monthly basis, factoring in how much you spend in a calendar month. There are many ways to differentiate between the two, but for me, the big difference between a “fixed” and a “variable” expense is that a fixed expense is a) something you must pay on a regular basis and b) it always costs the same amount each month.

To illustrate the difference between fixed costs and variable costs, let's consider a hypothetical scenario. Imagine you have a monthly budget of $2,000. Your fixed costs may include a $1,000 rent payment, a $200 car loan payment, and a $100 insurance premium. These expenses remain constant regardless of your other spending habits.

On the other hand, your variable costs may include $300 for groceries, $100 for utilities, $200 for transportation, and $200 for entertainment. These expenses can vary depending on factors such as the number of people in your household, time of year and usage (like your utility costs) your lifestyle choices, and your personal preferences.

Why is it important to understand the difference between fixed vs variable costs? Isn't it all just money?

Understanding the distinction between fixed costs and variable costs is crucial for effective budgeting. By identifying and categorizing your expenses accordingly, you can gain a clearer understanding of where your money is going and make informed decisions about your spending habits. Having this kind of knowledge helps you prioritize your financial goals, allocate resources efficiently, and make adjustments as needed. Knowledge truly is power.

Examples of fixed costs

I'm not going to list out every single example of a “fixed expense” in a personal budget, because everyone is different, but I'm happy to list out my own fixed costs.

• Mortgage
• Utilities (Power, Water, Gas)
• Cell Phone
• Internet
• Car Insurance (paid bi-annually)
• Health Insurance
• A lawn service 1x per month
• A cleaning service 1x per month (here's how I figure out when to outsource and when to do it myself)
• Debt minimums
• Monthly soccer fees for my kiddo
• Subscriptions

and more.

Ways to Cut Back on Fixed Costs

Piggybacking on my own fixed costs above, if I wanted to cut back, there are a few items I could scrap and save myself more money each month. I could cut out the lawn and cleaning services as I could in theory do those myself and I could eliminate nearly all subscription services, like Apple Music or Netflix.

You can also negotiate with your providers, either by calling and asking your current provider for a discount or shopping around for new providers offering a better rate. I recently swapped my cell phone service providers and was able to bundle my home internet offering with them and save $50/month.

I could also add more money back into my budget each month by paying off debt and eliminating the fixed expense of monthly minimum payments.

Examples of Variable Costs

From my own budget, examples of variable costs are numerous.

• Gas
• Groceries
• Expenses for my son (like clothes, toys, etc.)
• Shopping
• Utilities (as how much they cost depends on usage)
• Eating out
• Entertainment

It is easy to categorize all variable expenses as the “fun” expenses of life – vacations, clothes, concerts, and more. But some variable expenses are ones I need to get by, like gas and groceries. It is often easier to cut back on variable costs because, by the nature of them being variable, you can lower the amount you spend on them.

Ways to Cut Back on Variable Costs

I hate the personal finance advice that if you want to save money “just cut back.” But really, in times when you need to stop spending so much or are trying to get your budget in line, the cure for cutting back is to intentionally not spend.

But I also believe in paying less for the life you want, so I've included all of my best budgeting and saving money resources below!

• How to save $2000 in one month
• How to save $5000 in three months
• Why can't I save money? 15 reasons
• How to save money when you live paycheck to paycheck
• Best books on how to save money
• 61 things to do instead of spending money

Conclusion

In conclusion, fixed costs and variable costs play significant roles in budgeting and personal finance. Fixed costs remain constant over time and are necessary for maintaining a certain standard of living, while variable costs fluctuate based on personal choices and can vary from month to month. By understanding and managing these costs effectively, you can achieve greater financial stability and make informed decisions about your financial future.