Having a clear understanding what fixed expenses you pay for is vital to creating a successful personal and family budget. Many people don’t even realize these expenses don’t actually have to be fixed forever.
That’s the beauty of personal finance.
Once you start digging into it, you can approach your various financial categories from different angles to either decrease or eliminate them completely. If this is your first go at budgeting or you consider yourself a vet in personal finance, you are sure to find something useful for you today.
Table of Contents
- Definition
- Examples of Fixed Expenses
- Fixed Expenses and Your Budget
- Can I Decrease Fixed Expenses?
- Conclusion
Definition
A fixed expense is defined as “any expense not subject to or able to be changed during a portion of time.” You can reasonably expect these to remain set at whatever the predetermined amount is. I say reasonably because they aren’t set in stone.
Depending on the type of bill, it may change slightly from time to time based on factors like fees, taxes, and inflation. Other factors that can alter your fixed expenses are refinancing a loan, signing a new lease, or modifying an insurance policy. Typically, adjusting these expenses aren’t easily done but keep in mind that they don’t have to be fixed forever.
Examples of Fixed Expenses
- Mortgage
- Homeowners insurance
- Property taxes (if paid separate from mortgage)
- HOA fees
- Maintenance fees
- Rent
- Renter’s insurance
- Car loan
- Auto lease
- Vehicle insurance
- Life / Disability insurance
- Health / Dental / Vision or other insurance
- Student loan
- Bank fees
- Debt payments for your debt repayment plan
- Subscription services
- Memberships
- Cell phone
- Child care
Fixed Expenses and Your Budget
In terms of your personal budget, spotting fixed expenses should be fairly easy. They are paid on a regular basis whether it be monthly, quarterly, annually or some other pre-arranged schedule. Next time you view your bank and credit card statements, highlight all the fixed expenses and their respective amounts. You’ll need that for creating your budget.
With the many ebbs and flows of personal finance, being able to allocate a set amount of money to pay a batch of bills can make budgeting easier. Depending on the variety of expenses you consume, it may take some serious dedication on your part to reconcile every single bill. In the end this will be worth your time. You will thank yourself later.
When budgeting for fixed expenses:
- Calculate the total amount needed to save
- Save that amount from every paycheck
- Keep that money in a separate savings account
- Determine when each bill is due
- Allocate funds to pay those bills on time
MR. SIMPLE FI TIP: Make it simple for yourself, automate your funds to pay your fixed expenses. That’s simple for monthly bills. For irregular fixed expenses, allocate money to a separate savings account. Let that savings account accumulate until those bills come due and pay them. This comes in handy for avoiding missed payments.
Fixed expenses will be the easiest part of creating and maintaining your personal budget. Not knowing when unforeseen expenses will happen, because they will happen, it’s gratifying to know some part of your budget is stable.
If you like where your fixed expenses are at, then perfect, just leave them alone. You’re in a good financial place with your expenses. But if you’ve ever wanted to lower your expenses, there are a bunch of ways to do that, even for your fixed expenses.
Can I Decrease Fixed Expenses?
Nothing in your personal budget should ever be looked at as permanent. Permanence and budgeting don’t go hand in hand especially for those looking to achieve financial independence. If you have a family to provide for, it becomes exponentially more important to decrease spending anywhere you possibly can, at least within reason.
Saving money in this area of expenses will likely be significant considering these usually make up the largest chunk of your budget. Just imagine what lowering expenses could do for you. You lower the amount you spend, increase your financial gap, and lighten the financial load. It’s like ridding yourself of a financial burden.
MR. SIMPLE FI TIP: Financial gap is the space between your expenses and your income. For instance, say you earn $3,000 a month and spend $2,000, you have a financial gap of $1,000. On the contrary, if you earn $3,000 a month and spend $4,000, then you have a negative financial gap of -$1,000. You don’t want your financial gap number to be negative, that means you’re overspending every month. Lowering your expenses will help your financial gap to be positive and continue growing.
Keep in mind whether lowering a certain expense is worth the time. For example, refinancing your mortgage to save $100 per month might sound great. But if the associated fees are excessive or you plan on moving before the “break even” point maybe you should look at another expense to lower.
MR. SIMPLE FI TIP: Break even is defined as the point at which the monthly savings from a refinance offset the cost of refinancing. For instance, with a monthly savings of $100 after paying $3,000 to close a new loan, your break even point would be 30 months. Just divide the cost by the savings and you have your break even point.
Many other expenses could be prioritized as more important than, say, rTry to have a good financial reason for lowering an expense. Many other expenses could be prioritized as more important than, say, refinancing a mortgage.
Examples of decreasing your fixed expenses:
- Increase your deductible on insurance
- Reduce your insurance coverage
- Bundle insurances together
- Shop around for homeowners insurance
- Downsize to one vehicle
- Use a bike or walk for public transportation
- Split subscription costs with a relative
- Cancel subscriptions altogether
- Cut the cable cord
- Pay your bills annually vice monthly or quarterly
- Workout at home
- Switch to a cheaper cell phone plan
- Rent rather than own
- Downsize your home
- Negotiate your monthly rent
- Read books at your local library
- Select a bank with no associated fees
- Downsize to a single income family and drop child care
- Re-enroll during open season
With this list, you are only scratching the surface as to the number of ways to lower your fixed expenses. These savings can be huge over the course of a year since you are essentially lowering the annual amount you’d need to save for them.
Everybody’s expenses are different so tackle the “low hanging fruit” specific to your particular situation. Some of these don’t take much time at all to complete.
MR. SIMPLE FI TIP: Need help with picking one for starters, try switching to a cheaper phone plan. Since many people have been “grandfathered” into their plan, they won’t change for the sake of being “loyal.” Be loyal to your finances first. Put yourself first in this situation. It doesn’t take long to do and you could save upwards of $50 or more per month.
Lowering expenses is a major component to achieving financial independence and should be treated like a big deal. How else could you gain an instant increase in savings? All it takes is a proactive commitment on your part to make huge financial gains.
Conclusion
In summary, knowing what your fixed expenses are can help immensely In summary, knowing what your fixed expenses are can help immensely when setting up your personal or family budget. Knowing that you can regain control of your finances is that much better. Just as so many people want to lower expenses, this is probably the best place to start. You achieve the understanding of where your money is going and how it is being spent, you are that much closer to achieving financial independence.
Do you have a clear understanding what your fixed expenses are? Can you find ways to decrease those fixed expenses?