There are three types of household expenses: fixed, periodic, and variable. Fixed expenses, like rent, stay the same month-to-month. Variable expenses, like food and groceries, can vary month-to-month, and generally aren’t due on a set date. Periodic expenses include expenses that are billed quarterly or annually, as well as expenses like vehicle maintenance that come up now and then.
Let’s talk about each of these types of expenses in turn.
Fixed Expenses
Fixed expenses don’t change from one month to the next. Along with having a set due date, the amount you have to pay remains stable for a specific period. Mortgage and rent payments are classic examples. These remain stable over the course of one or more years, only varying after leases end or escrow accounts are re-evaluated.
Fixed expenses can also include vehicle payments and any monthly bills that remain stable in price from one month to the next.
Periodic Expenses
Periodic expenses are predictable costs that occur semi-regularly. They can vary a bit in terms of cost, and aren’t due on the same day every month like fixed expenses are.
Annual, biannual, or quarterly expenses that you need to handle on a specific day every year can qualify, regardless of whether what’s owed stays the same or not. Similarly, costs that happen predictably but are tied to a triggering event – like reaching a certain mileage level in your car – instead of a timeframe also qualify.
Some classic examples of periodic expenses are vehicle and home maintenance. Property taxes, holiday gifts, school supplies, pet vaccinations, and similar expenses also fall in this category.
Variable Expenses
Like their name suggests, variable expenses are less regular than fixed or periodic expenses. Often, this category includes all costs that are use-based, such as groceries or fuel – the more you use, the more you have to pay.
Utilities can also be variable expenses, as those are typically based on monthly usage or consumption. However, if you use bill averaging through your utility provider, that can actually turn this cost into a fixed expense.
Budgeting for the 3 Types of Expenses
Since each type of expense is a bit unique, you’ll need to use a different approach to plan for the corresponding costs. That ensures you have enough set aside to handle what you’ll owe, making it easier to allocate your income and avoid financial hardships.
Here is an overview of how to budget for the three types of expenses.
Fitting Fixed Expenses into Your Budget
Budgeting for fixed expenses is typically the easiest part of planning your finances. The due dates are mainly consistent, normally varying by little more than one or two days from month to month. Plus, the cost remains the same for a year or more.
In most cases, you’ll just need to list the bills by their due dates, ensuring you also record how much you’ll owe. Then, match them up to your preferred payment cycle.
For example, if you pay some bills out of each paycheck, you may separate the cost out between multiple paychecks to make them easier to manage. Otherwise, you may simply make sure that you have enough cash at the start of the month to handle them all, essentially performing a clean sweep.
Fitting Periodic Expenses into Your Budget
Budgeting for periodic expenses is often one of the hardest parts of creating a reliable financial plan for your household. Some of the costs don’t happen often enough to stay at the forefront of your mind, making it easy to overlook them until their due. Plus, others don’t follow set timing, and many come with shifting costs.
Usually, you’ll need to perform some calculations if you’re going to budget for periodic expenses. First, you’ll need to account for all of the periodic expenses you’ll encounter. Usually, you can do this by reviewing your spending from the past year, though a bit of self-reflection may also be enough if you don’t have many.
After that, you have to estimate the annual cost of those expenses. You can look at bank and credit card statements or contact local providers for quotes. Then, you need to determine how much you spend on each one per year, often by multiplying the cost of a single occurrence by the number of times you encounter that cost annually.
In many cases, it’s wise to add 5 to 10% to those estimates. That way, supply shortages, inflation, and other situations that can cause the cost to rise won’t derail your budget.
Once you have those figures, divide them by 12 to see how much you need to set aside monthly. Then, add the items to your budget either individually or by grouping like expenses to reduce the number of line items in your budget.
Finally, decide where to store the money. You could create separate savings accounts for each cost or category if you prefer. If you like the envelope system, you could take the money out in cash to set it aside. Just make sure you have a fireproof safe to hold the envelopes.
In most cases, you’ll want to review these expenses and update your budget annually. That way, you can adjust for price changes, ensuring your budget stays on target.
Fitting Variable Expenses into Your Budget
While budgeting for variable expenses isn’t as tricky as fitting periodic expenses into your budget, their inconsistent nature can make it a bit challenging. Usually, you’ll want to use one of two approaches to ensure you account for them in a reasonable way.
First, you can average out how much you usually spend on variable expenses each month. Often, this approach works best if the shift in the price is pretty modest. That way, a higher-than-average bill doesn’t derail your budget.
Second, you can budget for the highest possible cost for the expense. For bills that vary substantially – like electric bills in locations with a significant amount of variation during the year – this could be a safer choice. It ensures you can always pay the higher price, making it less likely that you’ll come up short than if you budgeted for an average.
Since some variable expenses can fall into each of those categories, using a combination of averaging and high-cost budgeting may be necessary. Otherwise, for bills with substantial fluctuations, you may want to treat them more like periodic expenses, setting extra money aside during low-cost months to ensure you have enough to tackle high-cost months.
Once you have the right amount, you simply add them to your budget like any other expense. You can assign them to specific paydays if that works better for your finances. Otherwise, make sure you have enough cash at the beginning of the month to cover everything.
Bonus Tip: Color-Code the Costs
In many ways, budgeting is an exercise in organization. Whether you use budgeting software or spreadsheets, color-coding your budget can make it easier to follow.
Consider using a different hue for each of the three types of expenses. That way, when you re-evaluate your budget every year or when something about your financial situation changes, you can tell at a glance which costs are part of which group.
You could even go a step further, using colors to denote which costs are automatically paid and which you have to handle manually. For example, you could assign the color blue to fixed expenses, using light blue for automatic payments and dark blue for those you have to handle personally. Again, this lets you know what you need to do at a glance, reducing your odds of missing a payment.
