Fixed vs. variable expenses: What’s the difference?

Quick insights

• Understanding the differences between fixed and variable expenses can help you make more informed decisions about your budget.
• Fixed expenses are costs in your budget that do not vary from month to month, such as your rent payment, insurance payment or membership costs.
• Variable expenses can change each month depending on your usage or consumption of the resource, like utilities, groceries and personal care items.

An effective budget is one that helps keep your spending in line with your financial goals. Creating a budget that works for you requires a good understanding of your fixed and variable expenses. Knowing the difference between these can help you account for the size and timing of different items in your budget. In this article, we’ll compare fixed and variable expenses and discuss how you can potentially manage these costs within your budget.

What are fixed expenses?

Fixed expenses are costs that do not change from month to month. Examples of fixed expenses include rent and mortgage, car payments, subscription services, student loan payments and insurance premiums. Expenses like these tend to be highly predictable: They’re typically the same size and paid on the same day each month. Fixed expenses also tend to include essentials within a household’s spending.

Because of their reliability and essential nature, setting aside money for fixed costs before other line items in your budget is usually the best course of action. And though fixed expenses are often the stable backbone of a budget, it’s important to note that such costs still come with some flexibility and potential liabilities.

Managing fixed expenses

If fixed costs are taking up a disproportionate amount of your budget, you may want to brainstorm ways to either cut costs or supplement your income. In some cases, fixed expenses can be negotiated, eliminated or swapped for a lower-cost option. For example, you could consider:

• Refinancing your car. It's possible that you may be able to refinance an existing car loan for a lower rate. Or, if you currently lease a vehicle, it may be more cost-effective to purchase a new or used vehicle instead of re-signing your lease.
• Downsizing your living space. If your rent or mortgage payment is eating into the rest of your budget, you may want to consider moving to a more affordable area or refinancing your home to reduce costs.
• Ending or switching memberships. A gym or streaming membership you pay for every month is technically a fixed expense, but you may find that you’re able to do without or use a cheaper alternative.

Changes like these could seem more dramatic compared to reductions on your variable expenses, which we’ll cover later in the article. As is the case with all things in your budget, it’s up to you to decide what to prioritize or adjust.

Staying on top of payments

The consistency of a fixed expense comes with certain expectations. Being late on the payment of a fixed expense could result in a range of consequences, depending on the situation. Overdue payments toward your car might result in added fees and a mark on your credit score; late payments on your rent could also affect your credit score, or even result in eviction.

One of the best ways to manage a fixed expense is to schedule an automatic payment to process on a recurring basis. When the size and timing of the payment is predictable, paying it manually every month takes up focus you could be using elsewhere in your budget.

What are variable expenses?

Variable expenses are costs that can change each month depending on your usage or consumption. Examples of variable expenses include groceries, gas, electricity, dining out, personal care, clothing and entertainment. Spending in these areas can range widely depending on the activities involved in the month.

Because these expenses are more fluid, variable spending typically requires active management in a budget. However, when it’s time to make cuts to your spending, you may find it easier to make an impact on these areas than on your fixed expenses.

Identifying variable expenses

There are many ways to get a handle on variable spending. A typical first step to controlling your variable costs is to understand the current state of your spending. To get a baseline, you can start by reviewing the last 60 days of transactions on your bank and credit statements. Using a digital spreadsheet or printouts, categorize your spending by type, add the totals and make observations. Generally, categories with high spending will stand out immediately.

Adjusting your variable costs

Once you’ve identified the variables within your spending habits, you can begin accounting for them in a more formal budget. Because variable spending relates to resources used or consumed, moderating these costs in your budget may require setting limits and making lifestyle adjustments. Some ideas include:

• Groceries: Naturally, groceries tend to be a tough area to cut back on, but frequenting a different grocery store, planning your meals, reducing specialty ingredients, deal-shopping and coupon-clipping could make a big difference in how far your budget can go.
• Electricity: Taking special care to turn off lights and electronics when not in use, opting for a fan over air conditioning, using smaller appliances like a toaster oven and microwave to heat food and air-drying dishes could lead to significant reductions in your utility bill at the end of the month.
• Entertainment: Keep an eye out for free activities, rentals and low-cost hobbies you can participate in. Libraries, park districts and community centers near you may offer media rentals, club nights or other kinds of resources to help make life more interesting while minding your budget.

Bottom line

Knowing which costs in your budget are fixed and variable can help you make better financial decisions throughout the month. While fixed costs are generally more rigid than variable expenses, it may be possible to make changes to both categories to bring your spending into alignment with your goals. As with any adjustments to your budget, it’s up to you to investigate costs and decide what areas are worth splurging or scrimping on for your best quality of life.