One of the most important parts of planning and sticking to your budget is understanding the differences between fixed, variable and periodic expenses. Knowing what types of expenses you have and how to plan for them can help you manage your money more effectively and get off the paycheck-to-paycheck merry-go-round.
Fixed Expenses — These are the expenses you have that don’t change month-to-month. Your mortgage or rent, car payment, and insurance are examples of fixed expenses. They may vary slightly from year-to-year (say, a rent increase) but overall you can count on them to stay the same for at least a year at a time.
Variable Expenses — Just as the name says, these are your expenses that will vary month-to-month and are probably the largest spending category. Variable expenses include such things as groceries, gas for your vehicle, utilities, entertainment expenses, and clothing. By keeping track of these expenses over time, you can get a better idea of how much you’re spending each month and plan accordingly. Utilities can become a fixed expense if your service provider offers an “equalizer” plan. These plans average your usage over time and charge the same each month, rather than spiking during times of increased usage (think summer AC bills in hot climates).
Periodic Expenses — These are the hardest expenses to plan for and the ones most likely to take you by surprise. Periodic expenses include things like annual vehicle registration, major car repairs, and holiday gift giving. For things you know are going to come up at least once a year, set aside a little bit each month to cover the cost. For example, set a designated amount to spend on holiday gifts in January, divide the amount by 12, and set aside that amount each month in a savings account dedicated for just that purpose. For truly unexpected expenses, such as a major car repair, an emergency savings account can keep you from having to charge it to a credit card. If you don’t have an emergency savings account yet, this should inspire you to start one.