Fixed Expenses vs Variable Expenses for Budgeting

what is a fixed expense

Although fixed expenses typically occur monthly, they can also happen weekly, quarterly, twice a year, and annually. We refer to any expense a company faces when producing its products or performing its services as a “cost”. This is the amount of money that businesses invest in buying and selling goods.

Are All Fixed Costs Considered Sunk Costs?

Your monthly expenses—regardless of how much you spend—include both fixed or variable costs. Planning your budget and using your money wisely both require an understanding of the differences. Depending on the type of expense, one pays fixed expenses on a regular basis. These payments may vary somewhat, alter dramatically, or remain constant.

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Unfortunately, variable costs are also some of the toughest expenses to cut back on, because doing so requires a daily commitment to frugal decision-making. It’s much easier to budget for fixed expenses than it is to budget for a variable expense or discretionary expense. Knowing the amount of a company’s fixed expenses assists in understanding how the retailer’s net income will change as volume changes. The total amount of fixed expenses can also be used to quickly estimate a company’s break-even point.

what is a fixed expense

Breakeven Analysis

You can also plan for a slow period of time by building cash reserves or setting up a line of credit. Saving can also be considered a fixed expense if you’re budgeting for it regularly. For instance, you may put $100 into your emergency fund every payday. If you do that consistently and include it as a line item in your budget, you may technically consider it to be a fixed expense if you don’t deviate from your savings habit. When making a budget, it’s important to know how to separate fixed expenses from variable expenses. In order to reduce your fixed expenses, it is important to be aware of your spending habits.

We refer to some fixed expenses as sunk costs, but not all of them. It is possible to spread the cost of more over the same amount of a fixed cost. A corporation may gain economies of scale in this way by raising production and lowering costs.

For example, manufacturers tend to have high fixed costs because they need equipment and space for their operations, even if they haven’t sold a single product. Fixed expenses can be used to calculate several key metrics, including a company’s breakeven point and operating leverage. Examples of fixed expenses are advertising, dues, equipment leases, insurance, and rent. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly or from year to year. Daphne Foreman is a former Banking and Personal Finance Analyst for Forbes Advisor. She has worked as a personal finance editor, writer, and content strategist covering banking, credit cards, insurance and investing.

  1. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
  2. Your variable expenses fluctuate monthly and are easy to adjust as you go, so it’s easier to plan these around your fixed expenses.
  3. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
  4. Meanwhile, fixed costs must still be paid even if production slows significantly.

For instance, your mortgage payment and gym membership usually will stay the same. Fixed expenses are important to track because they can self employment tax calculator have a big impact on your budget. They are the expenses that stay the same each month, while variable expenses change from month to month.

11 Financial is a registered investment adviser located in Lufkin, Texas. 11 Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. There are many ways to save for retirement, and most employers offer matching contributions to their employees’ 401(k) plans. Fixed expenses must be paid regardless of your budget, and they can make up anywhere from 40% to 75% of most people’s budgets. Companies can produce more profit per additional unit produced with higher operating leverage. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes.

Rebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She’s been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and debt, student loans, investing, home buying, insurance and small business. Water, gas and electric bills technically fit under the umbrella of basic living expenses.

They must be paid first, before you can spend any more of your budget on discretionary spendings, such as entertainment. They are a key factor in determining how much money is available for discretionary spending in a household budget. It makes up a large part of most people’s budgets, so it is important to be aware of how much you spend on these expenses each month. Another example would be if a salesperson gets paid on commission. Although this employee’s basic pay is constant, the commission they receive from each sale is not. Because the overall cost varies according to the volume of sales.