The 3 Types of Expenses in a Budget: Fixed, Periodic, and Variable
I spent years living paycheck to paycheck.
I never understood the importance of budgeting. When I was just starting out, I would spend first and ask questions later. I didn’t know there were 3 types of expenses in a budget and I didn’t care.
I would get paid, go have drinks with the guys, play a round of golf, and buy new sneakers or something else I didn’t really need. I would wind up not having enough cash to put gas in my car after paying rent. Once in a while, I’d go too far, to where paying rent on time became a matter of being late on some other bill.
When a bill came in, I was never 100% sure I had the money for it. I had a vague notion of what my expenses were, but I always spent more than I thought I would. My wallet was always empty at the end of the month.
That all changed when I realized that the purpose of a budget was not to torture or bore myself. I decided I needed to get on a budget to get my finances under control.
If you’re creating your first budget, there are three types of expenses you should understand: fixed, periodic, and variable.
The 3 Types of Expenses in a Budget: Fixed, Periodic, and Variable
What Are the 3 Types of Expenses in a Budget?
The three types of expenses in a budget are fixed, periodic, and variable. Fixed expenses are recurring expenses that don’t change and are usually paid monthly. Periodic expenses are less frequent (e.g. annually) and occur in predictable amounts. Variable expenses are often discretionary and can often be changed or eliminated by behavior.
Understanding these different types of expenses is important to creating a budget and managing your personal finances effectively.
What is a Fixed Expense?
For household budgeting, fixed expenses are predictable costs with amounts and due dates that don’t change. Fixed expenses will probably take up the largest percentage of your budget since rent, insurance, and car payments are fixed expenses. You often have limited control and a legal obligation to pay your fixed expenses.
Fixed expenses are consistent and usually paid monthly. When you’re setting up your budget, your fixed expenses will be the first entries you make. You’ll see they take up a large percentage of your budget.
You might struggle to afford your fixed expenses, but they won’t surprise you.
What are Examples of a Fixed Expense?
Typical fixed expenses include rent or mortgage payments, car loan payments, insurance premiums, and student loans. They are expected, consistent, and can’t easily be changed. You can sometimes lower fixed expenses by comparison shopping for better deals, switching service providers, or refinancing.
Here are some common examples of fixed expenses:
- Rent or mortgage
- Car loan payment
- Car insurance
- Renters insurance
These expenses are simple to budget for because they typically stay the same for at least a year and require regular payments.
How to Reduce Fixed Expenses
Even though fixed expense are consistent each month and might involve a contract, you can lower them.
Shop around for lower insurance premiums, find lower-cost providers for necessary services you use, and consider refinancing your home or auto loan. You could also move to a less expensive area or closer to work to cut fixed expenses.
If you’re a renter, find a cheaper place. Spending $100 less in rent each month won’t likely impact your quality of life much, but it will save you $1,200 on a one-year lease.
What Is a Periodic Expense?
A periodic expense is a cost that appears irregularly rather than monthly. Examples include tuition, car registration, and annual membership fees. Periodic expenses are harder to budget for. They’re easy to forget, and they can vary widely.
Budgeting for fixed expenses like rent and things we spend money on frequently is simple. You will not forget to account for your rent or groceries when you create your budget. You might forget about property taxes, back to school supplies, and your warehouse club renewal, though.
Periodic expenses are a bit more difficult to budget. Sometimes they get overlooked.
You don’t want to get hit with a big annual bill, then panic and scramble to come up with the money. Being unprepared to cover financial obligations is how some people get trapped in a cycle of debt. That’s why it’s extremely important to account for all periodic expenses in your budget.
You can divide your annual periodic expenses by 12, then put aside the resulting amount every month. Put aside the proper amount each month for quarterly or semi-annual expenses as well. If you do that, when a periodic expense pops up, you can just pay it without worry.
Periodic expenses can be fixed or variable. You know how much it costs to renew your Sam’s Club membership, but you don’t know exactly how much you’ll spend on back to school clothes and supplies.
For the periodic expenses that vary, go back through your spending. Come up with a ballpark number you can use to determine how much to set aside each month.
Periodic Expense Examples
Here are some examples of common periodic expenses:
- Property taxes
- Regular car maintenance
- Routine home maintenance
- Memberships
- Car registration
- Pet care
How to Reduce Periodic Expenses
Reducing periodic expenses can be challenging, because they’re often necessary. Not getting your oil changed to save a few bucks can cost you a lot more in the future. You can lower some periodic expenses by deciding if they’re really necessary or finding lower-cost alternatives.
Are you saving more than the cost of your warehouse club membership? You need a vacation at least once a year, but does it have to be an expensive resort? Comparison shopping and rethinking your spending will help you get those periodic expenses down.
What are Variable Expenses?
Variable expenses, also called flexible expenses, are expenses that fluctuate month to month. Many variable expenses are discretionary (such as entertainment, beauty products, and eating out), but some necessities (gas, groceries, and utilities) are also variable expenses.
Examples of Flexible Expenses
An example of a flexible expense is your grocery spending. Common flexible expenses include:
- Groceries
- Utilities
- Eating out
- Gas and transportation
- Entertainment
- Toys
- Hair Care
- Clothing
- Pet food and supplies
How to Reduce Variable Expenses
Variable expenses can often be reduced or eliminated from your budget by changing your spending habits and making different choices. Here are some ways you can lower variable expenses:
- Eat at Home More Often
- Slash Your Grocery Spending
- Save on Utility Bills
- Do a No Spend Challenge
Cutting back on variable expenses can be tough. Your lifestyle will probably change. That might take some getting used to.
Saying no to friends and family because you’re trying to save money can affect your relationships and lead to frugal fatigue. You can always suggest lower cost ways to spend time with people or explain your goals to them.
FAQ
Frequently asked questions about the 3 types of expenses in a budget.
Is food a fixed expense?
Food is not a fixed expense whether you mean groceries, meals out, or both. Your food spending will vary every month. Fixed expenses don’t fluctuate. Fixed expenses include rent, mortgage, and car loan payments.
Is a cell phone bill a fixed expense?
Fixed expenses don’t change month to month. A cell phone bill is a fixed expense for many people, but if you sometimes call long distance or pay overage charges, your monthly bill varies. If you don’t know what your bill will be, consider your cell phone a variable expense.
Should I convert periodic expenses to monthly averages?
Yes, you should convert periodic expenses to monthly averages. Dividing the annual amount of a periodic expense by 12 and setting that amount aside every month is the best way to budget for periodic expenses. If you do that, you’ll have the cash available when the expense comes up.
Is a flexible expense the same as a periodic expense?
Flexible expenses and periodic expenses are not the same. A flexible expense can be changed or cut from your budget by changing your spending habits. Flexible expenses include entertainment and groceries. Periodic expenses occur less frequently, like tuition or quarterly taxes.
What is a periodic fixed expense?
Fixed expenses are expenses like rent or mortgage payments that are the same amount each month. Periodic fixed expenses aren’t billed monthly. They might be billed quarterly or annually, but the amount due is the same each billing cycle.
What would be considered a variable expense?
Variable expenses are expenditures that are different every month. Variable expenses are often discretionary, but not always. For example, dining out is a variable expense, but buying groceries and putting gas in your car are variable expenses too since you’re spending a different amount on them every month.
Is entertainment a variable expense?
Entertainment is a variable expense. You can’t be sure exactly how much you’ll spend on entertainment every month. Your entertainment expenses also likely fluctuate. With fixed expenses like rent, you know in advance what the cost is every month.
