Creating a budget is essential to saving for your life goals, and an important part of establishing one includes knowing the difference between your fixed and variable expenses.
Fixed expenses are costs that typically remain the same in price and frequency, while variable expenses are costs that can change regularly.
If you have a good handle on where your money is going every month, it can help you master your budget and plan for the future. Let’s dive a little deeper.
What is a fixed expense?
Fixed expenses, like a mortgage or rent payment, cost the same amount on a routine basis. They’re the costs you can plan for and are likely already factored into your regular budget. These costs can occur at any interval, but they’re typically monthly or yearly payments.
Fixed expense examples
Here are some common fixed expenses:
- Rent or mortgage payments
- Car payments
- Insurance premiums (auto, home, renters, health, dental, life, etc.)
- Subscriptions and memberships (streaming services, meal kits, fitness memberships, etc.)
- Property/school taxes
- Tuition and/or childcare costs
- Cell phone and internet services
- Student loan payments
What is a variable expense?
Variable expenses are those that change in cost and occurrence. These expenses are more difficult to plan for, as they can vary depending on several factors, such as unforeseen events and discretionary spending.
Variable expense examples
Some common variable expenses include:
- Dining out
- Entertainment (concerts, movies, etc.)
- Personal care (haircuts, massages, etc.)
- Home, auto, and property maintenance
- Medical care
- Utilities (electricity, water, and gas)
Budgeting for fixed vs. variable costs
When it comes to budgeting for fixed and variable expenses, fixed expenses tend to be easier to plan for, since they are typically due at set times. Variable expenses are less consistent, making them harder to plan for in advance.
Overall, a large part of budgeting is determining the difference between wants and needs. The best way to do this is to remember that needs are the things you can’t live without, while wants are things you enjoy but aren’t necessary to your daily life.
For example, many fixed costs are “needs,” like rent and insurance. Meanwhile, some variable costs — like eating out and buying new clothes — may fall under the “wants” category. (Of course, some variable costs are needs, too, such as groceries, medical care, and utilities).
According to the 50/30/20 budget rule, 50% of your income should be allocated to “needs” and 30% should go toward your “wants.” The remaining 20% is dedicated to savings and investments.1
As a rule of thumb, here’s how to budget for fixed and variable expenses.