Understanding Fixed, Variable, and Periodic Expenses

There are three major types of expenses we all pay: fixed, variable, and periodic. Understanding the difference is important when creating your budget. 

Fixed expenses

• Same cost every month
• Due on a predictable schedule

From a budgeting perspective, fixed expenses are typically payments we have very little control over as they represent a legal obligation to pay, such as your rent or mortgage. So you usually can't easily reduce these expenses when you're looking to make budget cuts.

On the other hand, however, these expenses are also the easiest to account for in your budget because they stay consistent month in and month out (at least until it's time to renew the lease or Netflix raises the price...again).

Examples include:

• Rent and mortgage payments
• Car payments
• Insurance premiums
• Internet service
• Monthly subscriptions (streaming services, gym memberships, etc.)

As noted, however, fixed is not the same thing as permanent. These costs will be locked in for a period of time (often 12 months), but then may change, forcing you to decide if you can still afford the new payment. 

Periodic expenses

• Not due monthly, but still due regularly (annually, quarterly, etc.)
• Amount may be fixed, but more likely to be inconsistent

Periodic expenses are a little more challenging to budget for, because while you do know they're going to show up eventually, they're not something you pay consistently every month, like fixed expenses.  

Examples include:

• Vehicle registration and maintenance
• Property taxes
• Home maintenance
• Holiday and back-to-school spending
• Annual membership renewals (AAA, professional memberships, club fees, etc.)

With fixed expenses, it's pretty easy to connect your paychecks to those regular, every month payments. It's a lot trickier with periodic expenses, because some months you'll have to account for fairly significant spikes in your spending, and other months you won't. If you're not careful, it's really easy to forget about a periodic expenses and accidentally leave yourself short for the month.

The best way to avoid being surprised by periodic expenses is to plan for them in advance. That requires a combination of knowing what some things will cost (like annual membership fees), estimating what other things will cost (like maintenance for your car), and setting a budget for the rest (like Christmas shopping).

Take the total for all of these expenses across the entire year and divide that by 12. That's the amount you need to set aside each month for your big bucket of periodic expenses.

Some periodic expenses are much easier to plan for than others. Even if you budgeted for car repairs, something may happen that far exceeds your budget. It's also possible that some of these expenses may come earlier in the year and therefore be due before you've saved up enough money.

That's why it's important to have a general savings fund you can access for those kinds of situations. If you don't have money saved, you may need to use credit. That's not the end of the world by any means, but you'll want to rework your budget to account for those credit balances and the accompanying interest charges. 

Variable expenses

• Costs change from month to month
• Includes mix of essentials and discretionary expenses that can be reduced when necessary

Variable expenses are also known as discretionary expenses. While they can be challenging to budget for, this is where you have the most control, because these are the expenses that we can influence with our behaviors.

Examples include:

• Groceries
• Utilities
• Transportation (gas, bus, rideshare)
• Dining out, takeaway, and delivery
• Entertainment
• Clothing and personal care
• Household and cleaning supplies

The challenge to budgeting these expenses is that they're rarely the same every month (or even every week). Heating costs go up in the winter. Electric costs go up in the summer. Grocery costs just go up.

You can't build a budget off a one-month sample size. Instead, track your spending over time. Ideally, you'd look at a year's worth of data and create an average for every variable expense. That's especially helpful for those categories with big seasonal changes (like electricity). For the rest, three months is usually enough to establish an average.

Even though it's a bit trickier to budget for variable expenses, it's really important. Without the guardrails of a budget, spending in these categories can get out of hand quickly, threatening the rest of the your budget. Conversely, because some of these expenses are technically optional this is the first place people turn to make cuts when money gets tight. While it's good to have a little flexibility, some of these items aren't optional (looking at you, food, heat, and electricity) and others, while not necessities, make life a little nicer.

How to build a budget around all three expenses types

1. Use your fixed expenses as the foundation of your budget. These are consistent and usually non-negotiable. They should be the first chunk of money you account for.
2. Periodic expenses require planning and a little bit of projecting. Because only some of these expenses are flexible, this should be the second area to account for.
3. Don't treat variable expenses like a third class citizen (even if they do technically come third). There are opportunities to be flexible and save money when needed in this category, but there are also a lot of essentials. Make realistic spending plans based on previous spending (with a little cushion for inflation thrown in).

Need help making the most of your budget? MMI offers free financial counseling 24/7, online and over the phone. Let an expert do the heavy lifting and get a personalized action plan.