Fixed and variable expenses: what they are, examples and how to cut them
Fixed expenses are the ones you pay every month for the same or nearly the same amount, such as rent. Variable expenses change from month to month depending on what you do, such as groceries or going out. Separating them is one of the first steps to understanding your money, because it shows which part of your budget is committed before the month begins and which part depends on your choices.
Examples of fixed expenses
They share two traits: they repeat regularly and the amount barely changes. The most common are:
- rent or mortgage;
- insurance;
- loan payments;
- subscriptions, gym, phone and internet plans;
- childcare or school fees.
Examples of variable expenses
The amount depends on use or on your decisions:
- groceries;
- fuel and transport;
- restaurants and entertainment;
- clothes;
- gifts;
- trips.
The unclear cases
Not everything fits. Electricity, water and gas are paid every month, but the amount changes: these are semi-fixed, also called semi-variable, expenses. Treat them as fixed in your plan, using an average amount, and review it from time to time.
Then there are irregular expenses: payments you know about in advance but that don't arrive every month, such as annual insurance, property charges or car servicing. These are the ones that tend to derail a budget, because they feel like surprises when they aren't. The fix is simple: divide the annual amount by twelve and set that aside every month.
An example with made-up numbers: a 360 annual insurance bill equals 30 a month. If you set that aside, the bill doesn't upset that month.
Why it helps to separate them
It shows how much room you have. Subtract your fixed expenses from your income and the result is what's left for variable expenses and savings. On a take-home income of 3,000 with 1,700 of fixed expenses, you have 1,300 left.
It tells you where to act. The two types come down in different ways.
It shows your risk. The bigger the fixed part, the less room you have if income falls, because those payments keep coming.
Bear in mind that fixed doesn't mean essential: a subscription is fixed but not essential, while food is variable but essential. That's why this split complements the 50/30/20 rule, which separates needs from wants.
How to reduce each type
Fixed expenses are cut once, and the saving repeats every month with no more effort. Once a year, review:
- subscriptions you no longer use;
- your phone, internet and energy plans;
- insurance, comparing prices at renewal;
- the terms of your mortgage or loans.
Variable expenses depend on habits, so they take more persistence. It helps to set a monthly amount for the big categories, shop with a list and wait a day before an unplanned purchase.
If you have to choose where to start, start with fixed expenses: they take only one decision.
How to keep track
To make this split you need to see a real month. Take your statement, mark each transaction as fixed or variable and add up each group. You can do it in a spreadsheet: our guide to setting up an expense tracker has the steps.
In abacova, fixed expenses fit naturally as planned transactions: you enter the rent, the subscription or your pay, and they can post automatically on their date or wait for your confirmation. They feed the cash-flow forecast, which projects your balances and warns you if an account would go negative. For variable expenses, categories and rules keep what comes in sorted, and the dashboard's Spending pace card compares this month's spending so far with last month at the same day.
Where to start
Take last month and make two lists. Add them up and work out what share of your income goes on fixed expenses. That percentage shows how much room you really have, and from there you can decide how much to save each month.