When it comes to personal finance, there are 3 types of expenses with which you should familiarize yourself. Beyond that, if you want to improve your financial situation, you should learn how to budget and prepare for them properly. With that in mind — and before we get too much further — allow me to address the most obvious question: what are the 3 types of expenses?
The 3 types of expenses include: fixed, variable and periodic. Fixed expenses occur in predictable amounts and are usually paid in monthly intervals. Periodic expenses also occur in predictable amounts and intervals, but are much less frequent (i.e. quarterly). Variable expenses are discretionary and can be modified by your financial behavior.
And while we normally spend time talking about specific expenses like your cable bill, your mortgage, and your debt payments, in this article, I want to focus on the broader picture.
What follows is a guide to these 3 types of expenses, and how you can better prepare for them.
Let’s dive in!
Fixed expenses are the easiest type of expense for which to prepare, because they come in at both a consistent interval and amount. For example, expenses like your rent or mortgage, your car insurance, and your internet bill are fixed.
Sure, they may vary by a few dollars from one month to the next, but for the most part, they are fairly predictable. And since they are so predictable, the total amount you pay toward fixed expenses each month will essentially become your spending baseline.
The easiest way to budget for fixed expenses, is to start each month with a copy of the previous month’s budget. That way, none of your fixed expenses will fall through the cracks.
Reducing Your Fixed Expenses
If you are trying to reduce your monthly financial outflow, then fixed expenses are a great place to start. Unlike reducing or eliminating variable expenses — which only temporarily impacts your budget — whenever you find ways to reduce your fixed expenses, you are making an impact on your financial life for a long time going forward.
That’s why things like shopping for cheaper car insurance, or finding a less expensive cell phone plan can be so beneficial.
When you reduce your fixed expenses, you are decreasing your monthly cost of living.
If you want to reduce your fixed expenses, here are a few of the best ways to do so.
1. Pay Off Debt
One of the best, and quickest, ways to reduce the total amount you pay toward fixed expenses is to get out of debt. Think about it like this, every monthly debt payment you make is a fixed expense. So, every time you retire a debt, and eliminate that monthly payment, you are reducing the total amount you pay toward fixed expenses.
2. Reduce Your Insurance Premiums
No matter what kind of insurance payments you make each month, from renter’s insurance to car insurance, finding a plan that offers a lower monthly premium can have a seriously positive impact on your fixed expenses.
3. Reduce Your Cell Phone Plan
Cell phone plans can get a little ridiculous. And with so many different options out there, there is no need for you to pay through the nose for it. Shop around, and look for a better plan. This could end up saving you hundreds of dollars per year.
4. Reduce Your Rent Or Mortgage
If you feel like your fixed expenses are too high, and restricting your lifestyle, then you might want to consider reducing the cost of your living situation. For those of you with a mortgage, that might mean selling your house and buying a new home with a cheaper monthly payment. For renters it’s as simple as finding a new, cheaper place to lease.
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As I mentioned at the beginning of this article, periodic expenses are similar to fixed expenses. They still occur in predictable intervals, albeit much less frequent, and they can tend to vary in their amount.
Automotive expenses like regular oil changes, or your annual registration are great examples of periodic expenses. Additionally, if you are a business owner, quarterly taxes are likely one of your biggest periodic expenses.
Managing Your Periodic Expenses
The thing about periodic expenses, is they tend to be necessary, which makes them hard to cut from your budget. To use my previously mentioned examples, it wouldn’t be a good idea to reduce your periodic expenses by eliminating oil changes, or not paying your quarterly business expenses. Both of those are necessary expenses.
Instead, you should just be extremely diligent in budgeting and preparing for periodic expenses, so that they don’t sneak up on you.
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You can break variable expenses into two sub-categories: necessary and discretionary.
The necessary portion of variable expenses are things like gas for your car, your electric bill, and your monthly food budget. While they might not be a consistent amount, or occur at a predictable interval, they are still necessary.
The discretionary portion of variable expenses are things like recreational spending. For example, buying a new pair of shoes that you didn’t technically ‘need’, would be considered a variable, discretionary expense.
However, regardless of whether a variable expense is necessary or discretionary, part of what makes it variable is that you can control it in some way with your behavior.
For example if you want to reduce your electric bill, all you have to do is turn off lights, and consume less electricity.
If you want to spend less on gas, then you can take public transportation, or ride your bike to work.
Finally, if you want to reduce the amount you spend on discretionary expenses like recreation, then don’t buy that pair of shoes you don’t really need.
Variable expenses are the easiest to control when it comes to your financial life. You just have to make a conscious choice to do so.
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The 3 Types Of Expenses: Summary
The more you understand these 3 types of expenses, the better you can financially prepare for them. To review:
- Fixed Expenses occur in predictable amounts and intervals. In most cases, they occur on a monthly basis.
- Periodic Expenses are similar to fixed expenses, but they occur much less frequently. (i.e. quarterly or annually)
- Variable Expenses can be influenced by your financial behavior and decision-making. Additionally, they can be divided into 2 sub-categories: necessary or discretionary.
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