Easy Budgeting Tips to Manage Fixed and Variable Costs

Summary: Budgeting effectively involves managing both fixed and variable expenses, balancing needs and wants, and regularly reviewing your financial plan to ensure stability and achieve your financial goals.

If you want to get a handle on your finances, you need to have a budget. Managing your budget is an essential financial activity that can help you manage your money effectively. It can help you gain control over your expenses, track your spending, and save for the future.

When creating your budget, you need to look at both your fixed and variable expenses. Fixed expenses are those that occur every month, such as your rent or car payment. Variable expenses are those that change or vary each month. Let’s look at fixed and variable expenses and how you can manage those expenses through budgeting.

What is a fixed expense?

A fixed expense is a bill that costs you the same every month. It’s predictable and typically has set payment schedules. For example, your rent or mortgage usually costs the same every month.

Other examples of fixed expenses are:

• Insurance premiums
• Loan payments
• Streaming services
• Gym memberships
• Car payments
• Internet, cable and phone plans
• HOA fees

Fixed expenses are easier to budget for because they usually remain the same, regardless of changes in activity level, usage, or market conditions.

What is a variable expense?

A variable expense is a cost that fluctuates depending on usage or activity level. For example, your electricity bill may be higher in the summer months if you often run the air conditioner. Variable expenses can change from month to month based on consumption and other factors.

Other examples of variable expenses include:

• Groceries
• Utilities like electricity, water, and gas
• Gas for your car
• Entertainment
• Clothing
• Personal care products
• Travel
• Medical bills
• Home maintenance

Many variable expenses are things that we want as opposed to what we need. And sometimes those variable expenses could be challenging to control.

Fixed expenses vs. variable expenses: Which is more manageable?

When it comes to budgeting, it’s important to find a balance between your needs and wants to ensure you’re not overspending. For the most part, your fixed expenses are things that you need. You may not have a lot of wiggle room on these costs.

On the other hand, variable expenses are typically things you want. You have more flexibility on what you spend on variable expenses, and they are easier to cut back on if you need to reduce your spending. For example, you can save money by simply cutting back on how often you dine out.

Budgeting tips for managing fixed and variable costs

Managing your fixed and variable costs takes discipline and careful planning. Here are some steps you can take to get started:

1. Outline all your expenses

Sit down and list out all your expenses, then categorize them as either a fixed or variable expense. A spreadsheet can prove helpful in putting this list together. You can then calculate how much your fixed expenses are compared to your income, which will also give you an idea of what you have left over to spend on variable expenses.

2. Use a budgeting model

You don’t have to start from scratch when creating a budget because there are several budgeting models available that you can follow. One popular budgeting model is the 50/30/20 rule, where you allocate 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debts. This budgeting model works well with managing your fixed and variable costs since most fixed expenses can be categorized as needs, and many variable expenses are considered wants.

3. Negotiate on expenses

While fixed expenses don’t have the flexibility that variable expenses do, you can still take steps to reduce those expenses. For example, you can cut back on streaming services or change cell phone providers to save money.

It can also be easier to budget by negotiating for a fixed cost on variable needed expenses. For example, many utility companies will agree to “even pay” arrangements, where they bill you the same amount each month and not on actual usage. You may get a larger bill once a year to make up the difference. However, the likelihood of sticker shock from a huge heating bill in the winter is lower.

4. Determine where you can cut back

Categorizing your fixed and variable expenses into your needs and wants makes it easier for you to decide where you can cut back on your spending. This may mean cutting back on the number of streaming services you subscribe to or finding ways to save at the grocery store, such as buying generic products or couponing.

5. Review and reevaluate

Budgeting doesn’t end when you’ve created a plan. Life circumstances and financial goals can change over time. To stay on task with your financial goals, you should review them regularly and reevaluate your expenses. Using a budgeting app can help.

The importance of budgeting

Effective budgeting is crucial for taking control of your finances and achieving long-term financial stability. By understanding the differences between fixed and variable expenses, you can make informed decisions on where to allocate your money and where to cut back if needed. A well-structured budget helps balance your needs and wants, while also allowing you to save for the future.

Regularly reviewing your budget and adjusting for life changes ensures that your financial plan stays relevant. With discipline and the right tools, you can manage your expenses and reach your financial goals. Our financial representatives at Mutual of Omaha are available to advise you and help you achieve those goals.

Find a Mutual of Omaha financial professional near you.

FAQs

Q1. What are the 3 Ps of budgeting?

The three Ps of budgeting are paycheck, prioritize and plan. Your paycheck gives you an idea of what your take-home pay is, which can help you budget for your fixed and variable expenses.

Prioritize your expenses by determining which are wants versus needs. You’ll have greater flexibility in cutting back on your wants than your needs.

The third P – ‘plan’ – is your budget, which gives you the full picture of your income and expenses, what you’re spending money on and where you can cut back.

Q2. What are some strategies to reduce the fixed expenses in your budget?

Some strategies that you can take to reduce your fixed expenses include

• Negotiate for better prices
• Refinance loans
• Switch cell phone or internet providers
• Scale back on streaming services
• Cancel unnecessary subscriptions
• Consolidate your debts

Q3. How can you budget for variable costs?

Variable expenses are unpredictable and have the potential to throw your budget off balance. Look at your spending history and try to estimate what you spend on average for variable expenses like groceries, gas, and entertainment. Next, track your expenses each month to determine if you are spending more or less than you’ve estimated, then adjust your budget accordingly. It’s also wise to have an emergency fund that can act as a buffer when unexpected expenses arise.

Disclosures:
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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