Key takeaways

• Variable expenses can make monthly budgeting challenging.
• You can convert variable expenses to "fixed" sinking fund expenses to simplify budgeting.
• Following a simple budget can help you manage expenses and set money aside for your long-term goals.

If you're managing a household budget, it can be challenging to keep pace with mounting expenses. One way to help with your budget is to track both your fixed and variable expenses. We'll cover the distinctions between the two, as well as how to save money and budget for both.

Variable expenses definition

Variable expenses are those that vary from month to month. They can be expenses that only come up a few times a year or regular monthly expenses with differing amounts each month. 

These varying expenses can make monthly budgeting more difficult. Because you aren't dealing with the same fixed numbers every month, you have to adjust your accounting for how you spend your income.

For example, say you have an income of $5,000 per month and fixed expenses of $3,000 per month. If you have other expenses that vary from $500 to $1,000 every month, you have $1,000 to $1,500 left over for cash savings, contributing to your investment accounts, or discretionary spending. But you may not know going into a month which of those it will be, so variable expenses can take a bit of planning to manage.

Variable expenses examples

Any regular or semi-regular expense you have and can somewhat plan for is a variable expense.

Here are a few examples:

• Healthcare: You may know that you'll go to the dentist and doctor for checkups throughout the year, but you probably won't spend the same amount of money every month. 
• Fuel: How much you spend on gas depends on the cost of fuel in any given month, as well as how much you drive and where. You might spend more in a month if you're taking a long road trip, for example.
• Groceries: The changing cost of food, what types of food you buy, how many people you need to feed, whether you're hosting any special events and how many meals you eat at home all impact the cost of groceries for the month.
• Utility bills: Your electric, gas and water bill may change from month to month, depending on consumption.

Other common variable expenses for individuals and households include dining out, entertainment, clothing and shoes, personal care items, repairing or maintaining homes and cars and taxes.

Note that emergency expenses can also be variable expenses, although they're unique in that you don't have any time to plan for them. Some examples of emergency expenses include sudden car repairs or the bill for an emergency room visit after someone breaks their arm.

Fixed expenses definition

Fixed expenses are the opposite of variable expenses. They're bills and expenses that remain the same — or very close to the same — from month to month.

Expenses that are the same every month are much easier to budget for. You don't have to research or think about them each month. If you manage your budget with a spreadsheet, you can simply copy your fixed expenses over to the next month. If you use an app to manage your budget, the numbers carry forward, and you only need to adjust them if a specific fixed expense changes.

Fixed expense examples

Most people have at least a few fixed expenses. Here are some common fixed expenses to consider when creating your budget:

• Mortgage or rent: In most cases, these expenses are the same every month. You know how much your mortgage is and can plan for it months ahead of time. If you're renting, you know how much your rent is according to your lease and can plan for it to remain the same for the length of the lease. Adjustable-rate mortgages can be an exception, as an adjusting rate can change how much you have to pay each month, although it usually remains the same for a period of time.
• Insurance premiums: The amount you pay for home, car, health and other types of insurance is typically the same for an extended period of time. If you're quoted a rate for 6 months or a year, for example, you can consider this a fixed expense.
• Loan payments: Payments for auto loans, student loans and other types of installment loans are the same every month.
• Cell phone and internet bills: These are usually fixed bills that are based on what service level you choose, rather than how much of the service you use within a month.

Other common fixed expenses include streaming and subscription service fees and childcare expenses.  

Many people also treat savings as a fixed expense. For example, if you decide you want to put $300 total a month into a retirement fund, such as a 401(k) or Roth IRA, and $100 a month into a high-yield cash account, that's $400 in fixed expenses. You don't spend that money, but it does come out of your budget on a regular basis. 

How to save money on variable and fixed expenses

If you add up all your income and expenses and find that expenses outpace your income or are a bit too close for comfort, you may want to find ways to reduce both variable and fixed expenses. Reducing your expenses helps you stabilize your personal finances and can make it easier to help build wealth over time.

Each person's or family's needs are unique, so you'll have to consider your own situation when finding ways to save money. Start by considering some of the suggestions below.

Tips for saving money on fixed expenses

Saving money on fixed expenses usually requires making a specific change that results in reduced costs in the future. A few ways you might save money on these types of expenses include:

• Refinancing: If you have a better credit or debt situation than you did when you were first approved for a mortgage or car loan, you might be able to refinance your loan for better rates. That can lower your monthly payment. 
• Shopping around: You may be able to save on car insurance or other services by shopping around for lower rates. Switching to a new cell phone or internet provider might offer the same benefit. 
• Consolidating your bills: If your debt payments are eating up too much of your income every month, find out whether you can consolidate them into a single loan with a lower monthly payment.
• Adjusting the service level of your utilities: Take a look at cable, phone and internet bills. Can you simplify your service or cut out an option, such as a hotspot, to cut down on how much you spend every month?

Tips for saving money on variable expenses

Saving money on variable expenses often requires lifestyle or habit changes that result in lower costs associated with ongoing expenses. Here are a few ways you might save money on variable expenses:

• Set a maximum amount for dining out: If you analyze your spending for the past 6 months and see that you spend $300 to $500 dining out every month, you might decide to curtail that spending. You could set a goal of no more than $200 a month for eating out. If you stick to it, you'll save $100 to $300 a month.
• Start shopping sales: Being mindful of costs can help you reduce your grocery bill. Even if you only manage to cut your grocery expenses by $15 a week, that's still around $60 a month in savings — or more than $700 a year.
• Be aware of spending on utilities: Cut down on your utility bill by turning off lights and appliances around the house when you're not using them and setting the HVAC system a bit more conservatively. Again, you might only shave off $20 a month, but all these savings add up over time.

How to budget for variable and fixed expenses 

Budgeting can be daunting when you're considering many different expenses. However, if you approach budgeting in a consistent way and know how to plan for variable expenses, you have the potential to amass savings and have some fun money, too.

In order to follow this budget, start by adding up the necessities, like housing bills, groceries, healthcare and fuel. Be reasonable when estimating these costs. If you enter numbers that are too small, you won't be able to stick to the budget. If you enter numbers that are too big, you run out of income before you're done budgeting.

See how much you have left over after the necessities. If you're following the concept of zero-based budgeting, you want to bring that amount down to zero by "spending" or allocating all your funds. You might allocate some of what's left to savings and some to discretionary spending on things and activities you want (but don't need).

If you'd like a goal to shoot for in how you spend your money, you can opt for the 50-30-20 budget method. In this method, you try to spend 50% of your income on needs and 30% on wants. The remaining 20% is for savings. 

Fitting variable expenses into your budget

Sometimes, you can do a bit of budget math to convert variable expenses into fixed expenses. Here's how it works:

• Track what you spend on variable expenses for at least a few months — the more data you have, the better.
• Average how much you spend per month on each variable expense.
• Set the average you spend as a "fixed" budget item for each regular variable expense.
• Set aside the cash that you don't spend for future months in order to cover months when the expense is above average.

For example, say you spend an average of $800 on food each month. You set that as a fixed amount in your budget. In March, you spend $700, so you carry an extra $100 into April. In April, you spend $850. That overage is covered because you carried the $100 over from the previous month.

Variations still happen, but planning ahead for them makes it easier to help cover them when they arise.

Our take

Ensuring a positive cash flow can take work. When variable expenses are part of the budget puzzle, it can require even more effort. Planning ahead, taking steps to cut down on spending, and converting variable spending to fixed budget items are a few ways to help you manage your personal finances.