Financial experts advise people to create budget expenditures in line with their goals. This is true because you’re likely to overspend if you don’t have a budget. Then again, you won’t get the best outcomes if you don’t factor in periodic expenses when creating a budget. Periodic expenses typically occur irregularly instead of every month.
Types of Expenses in a Budget
An expense is an amount you part with for products and services you use daily. Aside from periodic expenses, you must also understand how fixed and flexible, or variable expenses affect your budget.
Fixed Expenses Definition
As the name implies, a fixed expense is that which remains constant and predictable over time. It doesn’t fluctuate, meaning you don’t have to take a wild guess on your next month’s fixed expenses. You also have little or no control over your fixed costs. And the amounts are predictable because you always know how much you’re expected to pay.
Fixed expenses may change occasionally, but the change does not occur regularly. For example, your landlord might raise your rental fees, or you might choose to switch to a new internet service provider.
Fixed expenses should be the first thing to include in your budget. This is because they’re paid in similar amounts at recurrent monthly intervals and take up the lion’s share of your budget.
From a planning standpoint, the more fixed expenses you have, the better. Your budgeting process becomes more accessible and more predictable. This is because the expenses remain more or less the same. For this reason, you can easily apply specific budgeting techniques like the 50/20/30 budget or zero-based budgeting.
What Are Examples of Fixed Expenses?
Here are some of the common examples of fixed payments:
- Rental fees or mortgage payments
- Car loan payments
- Utility bills
- Childcare costs
- Gym membership
- Phone service
Even though utility payments may change from one month to another, they are still classified under fixed expenses. This is because you get your utility bills monthly and always know the due date. Depending on your monthly usage, you may even predict your next month’s utility bill.
Another fixed expense that is unknown to many is savings. This applies if you set aside a specific amount every month. For example, you may put aside $150 into your savings account from your monthly salary. If you consistently maintain that savings habit, it qualifies as a fixed expense.
Examples of Periodic Expenses
Periodic expenses happen once in a while. They can be on schedule (I.e., Dec 15th each year), or they can come up randomly. Because they occur irregularly, these expenditures are the most difficult to plan for. Plus, they often take most people by surprise. For example, you might forget to budget back-to-school supplies for your children or other things like car maintenance or holiday spending. But budgeting for monthly payments like rent and utility bills is quite simple since you always have a budget for them.
Examples of periodic costs include:
- Holiday vacations
- Used car warranty
- Tuition fees
- Car registration
- Property taxes
You can avoid this issue by identifying your annual, biannual, or quarterly periodic expenses and dividing them into monthly averages.
What other expenses should form part of your budget apart from periodic expenses? Read on to find out.
What are Variable Expenses?
You can use the terms “variable expenses” and “flexible expenses” interchangeably. They are regularly occurring expenditures that change now and then. In contrast to fixed expenses, variable expenses afford more control over the payments you make. This means you can tailor them to fit within your budget.
Categories of variable expenses:
Necessary variable expenses comprise items like groceries and electricity. Wants include items like new clothing, eating out, and leisure activities. Take the case of a person who usually goes to the movies and likes to buy soda and sandwiches, for example. While watching a movie is entertaining, it is not a must. Opting to watch a movie at home with homemade snacks would save you money.
Due to their unpredictable nature, variable expenses are often complex regarding tracking and budgeting. You may, for example, need to collect all your grocery receipts to learn how much you spend on food supplies every month. Of course, that’s an arduous task. That’s why most people end up overspending on flexible expenses more than they had intended without even noticing. These days, thanks to technological advances, you can take advantage of a budgeting app to track all your flexible expenses.
Sometimes, you have absolute control over your flexible expenses. Let’s say you went out to buy new clothing. You can opt for cheaper, second-hand clothing to save money. In other cases, you have no control over how much money goes into these expenses. For example, when you fall sick and visit a hospital, your insurance provider will notify you about your copayment. Sadly, you lack any control over the matter.
Example of Variable Expenses
What’s included under variable expenses can vary from one household to another. However, there are some flexible expenses applicable common to most households. These include:
- Transportation (gasoline)
- Eating out
- Healthcare payments
- Home repairs
- Personal care costs
- Recreational activities
- New clothing
- Parking fees
You can lower your fixed costs, but it will require some time and effort to do so. To reduce your fixed and flexible expenses, you will need to employ negotiation skills, paying in advance, and shopping in the marketplace.
How to Reduce Your Fixed Expenses
Here are some of the ways that you can cut down on your fixed payments:
For your car or homeowner’s insurance, making upfront payments will save you some hard-earned money. Car loan payments are another stressor for most people. If you can avoid a car loan, the better for you. The trick is to save for your next car purchase.
For many people, rent takes a larger percentage of their monthly expenditure. One way to reduce your rental fees is to downsize to a smaller home. A smaller house will not only cost you less to buy or rent but also translate into reduced utility bills.
Another option is to renegotiate your housing contract for a lower rental amount. This is possible if you’ve lived in the rental property for longer. Painting the trim of your rental property might prompt your landlord to discount your rent by a few hundred dollars. Also, check if your landlord offers rent discounts for referring new renters to his or her property. You never know, so don’t shy away from asking.
It’s always a good idea to shop around to get the best deals and save money. For instance, childcare payments may be expensive, especially for daycare and preschools. Of course, price is not the only important factor, but you can try finding a balance between quality childcare services and what you can comfortably pay. There might also be a more affordable mobile phone plan than what you’re paying for.
Again, you don’t have to reduce coverage to lower your monthly insurance premiums. Instead, you can request several insurance quotes from different providers. Switching to a more affordable insurance company may save you hundreds of dollars annually.
End unused memberships and subscriptions
You may have several subscriptions that you hardly use. Take stock of all your memberships and subscriptions, and cancel whatever you aren’t using. For example, if you’re not using your gym membership, that’s a wasted fixed expense. Find alternative ways to keep in shape. You may opt for nature walks or morning runs instead.
How Can I Reduce Variable Expenses?
Because variable expenses usually fluctuate, you need proper planning. Otherwise, they can deviously ruin your budget and render your financial goals unachievable.
Here are some of how you can cut down on your variable costs:
Identify your flexible costs
After identifying these expenses, you can only devise a reasonable budget plan to control your variable expenses. You probably don’t know how much you spend each month on variable expenses. If so, you can look back on your financial history.
For instance, you may need to look as far back as six months to determine your food expenses. This is if your expenses change significantly from one month to another. Check your bank statements and calculate how much money has gone into food-related expenditures within the month. If your monthly food-related costs amount to $500, that’s about $125 per week.
You might budget $250 for your monthly food expenses but spend almost double that amount after adding dining-out expenses. That is why tracking your cash expenses, such as grocery purchases and restaurant bills, is equally important. Keep an account of those receipts to help you track what you’ve spent in a month. After accurately calculating your monthly average, you can plan accordingly.
Define Your Needs and Wants
Variable expenses are either a necessity or a luxury. For example, food and gas are absolute necessities. However, maid services or car washes are deemed as luxuries. You don’t necessarily need them, but you want to have them.
The trick is to eliminate fewer essential expenses from your monthly budget. Go through your bank statements to see your spending on your products or services. Then identify the wants or luxuries in your past spending habits. Removing a significant number of your luxury items allows you to free up a sizeable amount each month.
The Envelope System
A common mistake most people make is to keep money planned for their fixed and variable expenses in the same account. Let’s say you choose to spend $100 on groceries every week. You’re likely to surpass this budget allocation using debit card payments. So, it would be best if you had a budgeting tool that’s well-suited to simplifying the way you manage your variable expenses.
An envelope system is a good tool for expenses that typically change. These include gas, groceries, and entertainment. The envelope system employs labeled envelopes to allocate different budgets during the month.
You can have various money envelopes labeled as unique budget categories like groceries, gas, entertainment, etc. You can have as many money envelopes as you want. After deciding what your budget items are for the month, the next step is to decide on the amount of cash to distribute in each envelope. You can decide to put $300 in the groceries envelope, $250 in the entertainment envelope, and $100 in the personal care envelope.
These envelopes contain the only money you can use throughout the month. If you use up the cash inside the envelopes, you can’t turn to your credit or debit card as a backup option.
From the onset, using a paper envelope to plan your budget might seem outdated, especially in the current digital age. But that’s precisely the intention: a simple way to save money, which you can stick to for the long haul.
The envelope system works because cash payments stir up a pain reaction in your mind that stops you from overspending. The battle is won from a psychological perspective. Unlike a credit card, handing over cash makes you more conscious of your spending habits.
Switch flexible expenses into fixed expenses
The unpredictability of variable expenses makes them hard to budget for. It’s easier to manage your budget when you have fewer variable expenses. So switch your variable expenses to fixed costs.
Take the example of gasoline and electricity expenses. They fluctuate considerably based on the season, making them difficult to budget. Your electric expenses may remain low from autumn to spring but skyrocket during summer amid sweltering heat conditions. Likewise, your gasoline expenses might be relatively steady from June to August but a killer from December to February.
Speak to your utility company about the option of an equal payment plan. This is a plan to maintain predictable utility payments. To balance your utility expenses across the year, utility providers charge a preset monthly amount. This is based on your usage derived from the past year. The company studies your account to set the following year’s payments when the year ends. Any year-end balances are carried forward to next year’s new payment plan. A fixed utility rate will help you budget accordingly.
Limit your coupon use
Coupons offer great discounts when shopping for new clothing, school supplies, or groceries. However, just because you have a coupon for a specific item shouldn’t mean you should overspend.
Carry packed food or home-brewed coffee
A cup of coffee may not seem like much at your favorite coffee shop. But, when you’re visiting that coffee shop several times a week, the bills rack up pretty fast. The best alternative is to brew your coffee at home. Leave the coffee shop for special events. Likewise, carrying packed lunch to work instead of eating a sandwich and fries at a restaurant is worth the savings.
How to Budget for Fixed, Flexible, and Periodic Expenses
The zero-based budget is a brilliant budgeting method for your personal finance. The name sounds somewhat creepy but doesn’t fret. Zero-based budgeting means that when you subtract your expenses from your income, it equals zero.
That does not mean you’re left with nothing in your bank account. It simply means budgeting for every dollar of your salary. Let’s say you earn $4000 a month. Budgeting for all your expenses, including savings, should total $4000. That means no dollar is left in the bank account without a purpose.
Here is the process of creating a zero-based budget:
Jot Down Your Monthly Income
Income refers to your monthly salary and any other source of earnings during the month. Add everything up, including income from your side hustles, to get your total monthly income. That could be $2,000 or $3000 per month.
Identify All Your Expenses
Have the entire month in mind when drafting your expenses. Are you going to an out-of-town event this month? Does your car need service maintenance? Think of all your fixed, flexible, and periodic expenses, and list them all down.
These could include:
- Tithe (10 percent of your income)
- Essentials (Rent, food, utilities, transportation, groceries)
- Other necessities ( child care, insurance premiums, debt)
- Extras ( Entertainment, clothing, and recreation expenses)
- Savings (20 percent of your income)
Remember to add a miscellaneous category for more leeway in your spending. That means when any expense pops up out of the blue, it isn’t a challenge since there’s room for it in the budget.
Deduct All Your Expenses From Your Monthly Income
Your expenses should gobble up all your income, leaving you with zero balance. If you get a negative number after subtracting your planned expenses, it’s a sign that you’re spending above your means.
It’s time to cut down that budget. Look at areas where you can reduce your spending. For example, check how you can reduce your food costs or entertainment expenditures.
Track Your Planned Expenditures
After creating a zero budget, it’s time to track your costs. This includes each budget cost. It is the key to successful budgeting because funds that come in or get used are deployed in the correct budget line. After paying rent, deduct that cost from the housing. When you pay utility bills (water, electricity, cell phone), deduct that from the utility bills under variable expenses.
You must create a budget to stay on top of your spending habits. First, you must understand your fixed, variable, and periodic expenses. Doing so allows you to analyze your spending practices, track your planned expenses, and free up funds for your other wealth-creation ventures.
Here are some common frequently asked questions about budgets and expenses:
Rent is not a flexible expense. It’s a fixed expense because it doesn’t fluctuate from one month to another. For example, you may have a lease contract of $1500 a month for the next year for a residential property. Flexible expenses vary regularly depending on usage and include items like utility bills and groceries.
In the business setting, flexible expenses can change based on business performance. For example, the high production of goods translates to higher budget expenditures on packaging and distribution. However, the packaging and distribution budgets change accordingly if the company scales down production. Other examples include employee recognition awards or advertising expenses, which the company can stop at any time.
The three expenses that make up your budget are: Fixed, Variable, & Periodic
Examples of fixed expenses include Mortgage or rental fees, Insurance, Electric, water, and cell phone service bills.
While fixed expenses appear to be locked in, they have some flexibility. For example, you can move to a less expensive neighborhood to reduce the rent amount you’re currently paying. You can also shop for better insurance rates and switch to an affordable provider.
Cutting down your flexible expenses is possible through various methods. For example, you will need to be warier of prices when shopping for groceries. Also, you will need to scrutinize your flexible expenses and determine whether they qualify as necessities or luxuries. You should reduce your spending on things like dining out or buying new clothes often as these are not necessities.
Variable expenses frequently change from period to period. They include things like groceries and transportation costs. These expenses are within your control as you can decide if you want to spend on them and how much to allocate them.
Variable expenses include Coffee, Groceries & Gas
You need to take a close look at your finances. This entails looking at your income vis-à-vis your expenses. Speaking of expenses, you will have to analyze your three budget expenses, namely fixed, variable, and periodic expenses.
The rule proposes budgeting your income: 50% on needs or essentials, 30% on wants, and 20% on a savings plan.
Yes, periodic expenses should always get converted to monthly averages. You should add your periodic expenses to your monthly budget. Let’s say you spent $480 on your last holiday vacation. To plan for this year’s holiday travel, you need to break down that amount into monthly amounts. To do so, take the holiday spending and divide it by 12.
Add the $40 ($480 divided by 12) to your monthly budget as a holiday expense. Ideally, keep that money in a different account from your daily expenditure account so you don’t end up using it.
According to the 50/30/20 rule, you should save at least 20 percent of your monthly gross income. Of course, you’re free to save more than that if you can.