Fixed vs. Variable Expenses: What's the Difference?

You've got a month of bills in front of you and a budget to build or fix. You want to know which costs you might be able to change in your favor.

Budgeting starts with a list of your bills and other expenses. One way you can sort that list is by whether it changes from month to month. 

What are fixed expenses?

A fixed expense is a bill you pay each month for about the same amount, and can’t easily change.

Fixed expenses on a household budget might include:

• Rent or a mortgage payment
• A car loan or lease payment
• Student loan payments
• Condo or homeowners association fees
• A cell phone plan
• Internet or cable service
• Car insurance and health insurance you pay yourself
• Child support or alimony

A fixed cost might change from time to time: Rent can go up when you renew a lease (or down when you move to a new place with lower rent). Your internet provider might raise rates. If your mortgage payment includes escrow (money set aside for property taxes and homeowners insurance), it can rise or fall when those costs change.

Once fixed expenses are set at the new amount, they stay steady for a while.

What are variable expenses?

A variable expense changes from month to month. (You might see slightly different terms elsewhere. For instance, "flexible expenses.")

A variable bill can move up or down with:

• Your habits. Bike to work on nice days for a month, and your gas spending may drop.
• Your usage. A utility bill rises and falls with how much you use.
• The season. A heating bill runs lower in May than in December, and gasoline prices tend to peak in the summer.

Common variable expenses include groceries, eating out, gasoline and parking, public transportation, household supplies, clothing, haircuts, pet care, and entertainment.

Variable expenses are largely under your control, so start here when your budget comes up short.

What is the difference between fixed and variable expenses?

If it costs the same each month, it's fixed. If the amount can fluctuate, it's variable. You have little or no control over a fixed bill in the short run, and much more over a variable one.

Some fixed expenses don’t happen every month. Car insurance, for instance, may get paid only once or twice a year, but since it’s a consistent, known amount, it’s a fixed expense.

For discretionary expenses, use a second test: Does the cost pay for a want rather than a need? 

Are groceries a variable expense?

Groceries are a variable expense, but they're also essential. The amount usually changes from month to month, and food is one of the basic things you need to live. So "variable" doesn't mean "optional."

Similarly, utilities are due every month, but the amount changes with how much you use. Like food, utilities count as a need.

Budget for expenses like these by approximating, then work on lowering the amount. Consider asking your utility about assistance programs or a level payment plan, which spreads a year's use evenly over 12 months, making it far more consistent. To compare your food spending, you can check the average grocery bill.

What are discretionary expenses?

A discretionary expense is a want, things that are nice to have but aren't strictly needed for living or for earning an income.

Examples of discretionary spending include:

• Eating out
• Entertainment
• Vacations

Eating out is variable, and it's also discretionary. The line between need and want is personal, so draw it by your own priorities. 

Some people use the 50/30/20 rule to decide how much money goes to which category. The rule puts 50% of your take-home pay toward needs, 30% toward wants, and 20% toward saving. To check how your budget percentages look, add up a month of spending on your needs, then on your wants, and get the percentage by comparing each with your take-home pay. If your spending doesn't match your priorities, the wants are where to look for changes.

How to budget for fixed and variable expenses

Budget your fixed bills first, and use approximations for items that vary. Cover needs before you spend on wants.

Here's one household's month. You can try sorting your own bills the same way.

This household can trim its variable needs (utilities, groceries, and gas), but it can't skip them. The $300 in wants is the first place to cut if money is tight.

How to budget for fixed expenses

Budget fixed bills in this order:

1. List each fixed bill at its full amount and due date, including bills paid automatically.
2. Turn non-monthly bills into a monthly amount. Divide an annual bill by 12, a twice-yearly one by 6, and a quarterly one by 3.
3. Move that amount into a sinking fund each month, savings set aside for that bill, so the money is ready when it comes due.

Some fixed bills can come down:

• Phone, cable, and internet. Ask for a lower-cost plan, or consider switching providers if you can find lower-priced options.
• Insurance. Consider raising your car insurance deductible to lower your premium. Compare rates with other insurers, and ask about bundling home and car coverage.
• Loans. A refinance could lower the payment. Check that the new rate, with fees, saves money overall.

How to budget for variable expenses

Set your budget amount from what you actually spend:

1. Track what you spend in each category. Add up three months and divide by three for a recent average.
2. Set a realistic target. For example, a household that spends $350 a month on groceries might buy some foods in bulk to bring that down.
3. Check each total at month's end, and use it to plan the next month. Create a sinking fund for special occasions and holidays, or you could run short in the month they happen.

Easy places to trim (if you haven’t already):

• Eating out. Bring lunch to work.
• Groceries. Buy store brands and use coupons.
• Home energy. Set the thermostat lower in winter and higher in summer.
• Memberships and streaming. Cancel what you use the least.
• Clothing. Buy secondhand or wait for sales.

Where debt payments fit in a budget

Debt payments can be fixed or variable, depending on the kind of debt. Two questions can help you settle where yours go and how to handle them.

Is a minimum payment a fixed expense?

A credit card minimum payment is due every month, but it isn't necessarily a fixed amount. Your credit card agreement includes the formula: some cards charge a flat amount, and others a percentage of your balance. 

A fixed-rate loan payment usually stays the same for the life of the loan. A variable-rate loan payment may go up when the rate rises.

Pay at least the minimum on time, because a late payment may prompt a late fee and higher interest rates, and a payment 30 or more days late can stay on your credit reports for seven years. 

What if fixed expenses and debt leave no room for adjustment?

If nothing is left to cut from your budget, consider asking your creditors to lower a payment, and/or turn to outside debt help.

Your debt-to-income ratio (DTI) can help you figure out exactly how your debt situation looks. Add your monthly debt payments, then divide by your gross monthly income (your pay before taxes). At $2,000 in payments on $6,000 of income, about 33% of your income goes to debt.

Many credit card companies will change your payment in a financial emergency. Some mortgage lenders will reduce or suspend payments for a short time.

If making a call isn't enough, you can look for outside help:

• Nonprofit credit counseling. A credit counselor may be able to enroll you in a debt management plan to pay off your credit card debts. 
• Housing counseling. A counselor approved by the U.S. Department of Housing and Urban Development (HUD) gives homeowners free help avoiding foreclosure. Find one through HUD at 800-569-4287.
• Energy and phone help. The Low Income Home Energy Assistance Program helps with home energy bills: find out how to apply at Energyhelp.us or 1-866-674-6327. Lifeline, a federal program, discounts phone or internet service for people with low incomes. Apply online or through a participating phone or internet provider.
• Federal student loans. Repayment assistance could help you get a more affordable payment. 

Bills Action Plan

1. Sort a month of spending two ways. Mark each cost fixed or variable. Then mark any of your wants you could drop or lower.
2. Set a monthly amount for each cost. Include the monthly share of quarterly and annual bills, and move that share into a sinking fund so no bill catches you short.
3. Cut your wants first, then call your creditors if needed. If fixed bills and debt still take all your income after you trim, call the companies you owe before a payment is late. Consider looking for more personal finance help.

Key Terms

Fixed expense: A bill that costs about the same each time, like rent.

Variable expense: A cost that changes from month to month, like groceries.

Discretionary expense: Spending on wants, like eating out.

Minimum payment: The smallest amount you must pay each month on a debt.

Debt-to-income ratio (DTI): Your monthly debt payments, including any mortgage payment, divided by your gross monthly income.

Sinking fund: Savings you set aside each month for a bill you know is coming, like new tires for your car.