Mastering the Three Expenses: Fixed, Variable, and Periodic
A normal budget breaks down expenses into three categories: Fixed, Variable, and Periodic.
What are Fixed Expenses?
Fixed expenses are the easiest ones to grasp and usually the easiest to plan for. They happen regularly and are the same cost every time. Your mortgage payment is a fixed expense. Your car payment, insurance payment, and any other set, regular payment are all fixed expenses. They’re easy to plan for because you know what they’ll cost and how often you’ll need to pay them.
What are Variable Expenses?
Variable expenses are the biggest category. These include food, utilities, entertainment, and transportation costs. A variable expense occurs semi-regularly and the cost can changes depending on a number of factors. For example, you don’t pay the same amount every time you shop for groceries, so the cost is variable.
You can plan for variable expenses by examining your spending over a period of time and creating an average for each category. This means that each individual payment might not hit the budget exactly the way you planned, but over time and multiple payments you’ll (hopefully) arrive at your estimate.
What are Periodic Expenses?
Periodic expenses, by comparison, are the trickiest expenses to plan for because while they occur regularly, they’re usually rare (maybe once a year) and can vary widely. Gift giving falls into this category, along with maintenance and repair costs for your home and automobile.
How to Budget for Periodic Expenses
The problem with periodic expenses is that when we’re drawing up a budget we tend to forget to consider these costs. You don’t forget to account for your rent or your electric bill because you have to pay those every month. But if you’re planning in January you might forget that by the end of the summer you’ll need money to buy your kids back to school clothes and supplies.
It’s easy to forget about property taxes, car registrations, and the fact that your tires probably need to be replaced this year. So even though you’ve paid for these things before (many times) they can still sneak up on you and ruin an otherwise solid budget.
The simplest way to plan for a year’s worth of periodic expenses is to do a thorough inventory of all the periodic expenses you incurred last year. Any expense that isn’t fixed and isn’t accounted for in your variable category is periodic and goes in the pile.
Once everything is gathered, total up the cost of every expense and divide by 12. Now take that number and add it to your budget. This is the amount you need to save every month in order to cover your periodic expenses.
It’s an estimate, of course, so some years your periodic expenses might outpace your designated savings, and some years you might have money left over. Even if it’s not exact, at least you’ll never be caught unprepared by a periodic expense again.
If you need help sorting your expenses, financial counseling from MMI is free, confidential, and available 24/7. Let our experts help you make the most of your money.