Easy Budgeting Tips to Manage Fixed and Variable Costs

Expert Reviewer: Adam Olson, CFP, LUTCF, FSCP, RICP

Summary: Budgeting effectively involves regularly reviewing your financial plan to help ensure stability and achieve your financial goals. This article discusses budgeting tips to help manage your fixed and variable expenses.

If you want to get a handle on your finances, you need to have a budget. Managing your budget is an essential financial activity that can help you manage your money effectively and avoid struggling with debt, the number one cause of stress for most people. It can help you gain control over your expenses, track your spending, and save for the future.

When creating your budget, you need to look at both your fixed and variable expenses. Fixed expenses are those that occur every month, such as your rent or car payment. Variable expenses are those that change or vary each month. Let’s look at fixed and variable expenses and some budgeting tips on how you can manage those expenses.

What is a fixed expense?

A fixed expense is a bill that costs you the same every month. It’s predictable and typically has set payment schedules. For example, your rent or mortgage usually costs the same every month.

Other examples of fixed expenses are:

• Insurance premiums
• Loan payments
• Streaming services
• Gym memberships
• Car payments
• Internet, cable and phone plans
• HOA fees

Fixed expenses are easier to budget for because they usually remain the same, regardless of changes in activity level, usage, or market conditions.

“It’s easy to focus on everyday bills, but don’t overlook major purchases when evaluating your monthly fixed expenses,” advises Adam Olson, Mutual of Omaha Certified Financial Planner and Wealth & Retirement Strategist.

He continues, “When it comes to managing major purchases, I recommend a disciplined approach: put at least 20% down on cars and homes, keep car payments under three years and below 8% of your income, and ensure your mortgage doesn’t exceed 20% of your income. And remember—don’t finance fun. Pay cash for toys like RVs, boats, motorcycles, or second vehicles to avoid unnecessary debt.”

What is a variable expense?

A variable expense is a cost that fluctuates depending on usage or activity level. For example, your electricity bill may be higher in the summer months if you often run the air conditioner. Variable expenses can change from month to month based on consumption and other factors.

Other examples of variable expenses include:

• Groceries
• Utilities like electricity, water, and gas
• Gas for your car
• Entertainment
• Clothing
• Personal care products
• Travel
• Medical bills
• Home maintenance

How to manage fixed expenses

It’s important to find a balance between your needs and wants to ensure you’re not overspending. Mostly, your fixed expenses are things you need. You may not have a lot of wiggle room on these costs.

But if your fixed expenses seem to get out of hand, there are budgeting strategies you can use to manage fixed costs. One option is to set up automatic payments to ensure your bills are paid on time and in full. This eliminates the risk of forgetting to pay a bill or incurring late fees and interest charges.

Staying on top of your fixed-expense deadlines is a smart budgeting move. Another way to manage them is by negotiating better rates or deals.

Example of managing fixed expenses

Jessica reviews her monthly bills annually to look for savings opportunities. During a review, she noticed her electricity bill was considerably higher than the previous month because she had run the air conditioner often. She contacts the electric company, they averaged her monthly usages out over the past year and put her on a level payment plan to help smooth out seasonal fluctuations in her bill. This change ensures she’s not surprised again with a large bill.

How to manage variable expenses

Unlike fixed expenses, variable expenses are typically things you want. You have more flexibility in what you spend on variable expenses, and they are easier to cut back on if you need to reduce your spending. The key is to create realistic spending limits for your variable expenses and to have a plan on how to stick to those limits.

Example 2: Managing variable expenses

Marcus noticed that his food and entertainment spending fluctuates wildly each month. To bring more consistency to these variable expenses, he started to use a prepaid debit card with a set  amount just for groceries and dining out. He also pays more attention to sales and uses coupons, which have helped him cut his grocery bill by about 20%.

Budgeting tips for managing fixed and variable costs

Managing fixed and variable costs requires discipline and planning. Here are practical steps to begin.

1. Outline all your expenses

List all your expenses, then categorize them as either fixed or variable expenses. A spreadsheet can prove helpful in putting this list together. You can then calculate how much your fixed expenses are compared to your income, which will give you an idea of what you have left over to spend on variable expenses.

2. Use a budgeting model

You don’t have to start from scratch. One popular budgeting model is the 50/30/20 rule, where you allocate 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debts. This budgeting model works well with managing your fixed and variable costs since most fixed expenses can be categorized as needs, and many variable expenses are considered wants.

Pro Tip: Using a budgeting app can help and most tools recommend specific budgeting models you can follow easily in the app.

3. Negotiate expenses

While fixed expenses don’t have the flexibility that variable expenses do, you can still take steps to reduce those expenses. For example, you can cut back on streaming services or change cell phone providers to save money.

It can also be easier to budget by negotiating a fixed cost on variable expenses. For example, many utility companies will agree to “even pay” arrangements, where they bill you the same amount each month and not based on actual usage. You may get a larger bill once a year to make up the difference. However, the likelihood of sticker shock from a huge heating bill in the winter is lower.

4. Determine where you can cut back

Categorizing your fixed and variable expenses into your needs and wants makes it easier for you to decide where you can cut back on your spending. This may mean cutting back on the number of streaming services you subscribe to or finding ways to save on food expenses by routinely meal prepping your lunches or learning how to make your morning lattes at home.

5. Review and reevaluate

Budgeting doesn’t end when you’ve created a plan. Life circumstances and financial goals can change over time. To stay on task with your financial goals, review them regularly and reevaluate your expenses.

The importance of budgeting

Effective budgeting is crucial for taking control of your finances and achieving long-term financial stability. By understanding the differences between fixed and variable expenses, you can make informed decisions on where to allocate your money and where to cut back if needed. A well-structured budget helps balance your needs and wants, while also allowing you to save for the future.

Olson adds, “Needs include basics like food, shelter, clothing, insurance, and transportation. Everything else—streaming subscriptions, weekly dinners out, daily coffee runs—is a want. These extras can add up quickly, so being honest about what’s truly essential is key to staying financially healthy.”

Regularly reviewing your budget and adjusting for life changes ensures that your financial plan stays relevant. With discipline and the right tools, you can manage your expenses and reach your financial goals. Our financial professionals at Mutual of Omaha are available to advise and help you achieve those goals.

Find a Mutual of Omaha financial professional near you.

Frequently Asked Questions

What are the 3 Ps of budgeting?

The three Ps of budgeting are paycheck, prioritize and plan. Your paycheck shows your take-home pay, helping you budget fixed and variable expenses. Prioritize your expenses by determining which are wants versus needs. You’ll have greater flexibility in cutting back on your wants than your needs. The third P, plan, is your budget, which gives you the full picture of your income and expenses, what you’re spending money on and where you can cut back.

When reducing expenses, does maintaining an emergency fund remain important?

Having an emergency fund is still essential, even if you’re focusing on reducing expenses. An emergency fund acts as a financial safety net, preventing you from falling into debt when unexpected expenses arise. Without it, you might need to rely on high-interest loans or credit cards, which can ultimately increase your expenses. It is important to set aside even a small amount regularly for emergencies to provide long-term financial stability. Start with a modest goal and gradually build your fund.

How useful are budgeting tools and apps in managing finances?

Many apps can automatically track your spending by linking to your bank accounts and credit cards, providing a clear picture of where your money goes. Some tools often categorize your spending into different areas, such as food, utilities, and entertainment, helping you see where you might be overspending. Other tools or apps can send you reminders to pay bills or notify you when you’re nearing your budget limits, keeping you accountable.

Expertly Reviewed by: Adam Olson, CFP, LUTCF, FSCP, RICP

Adam is a Certified Financial Planner, author and podcast host with a deep passion for helping clients navigate all aspects of personal finance, from financial planning and investment management to life and health insurance. His goal is to empower individuals and families with the knowledge and tools they need to make confident financial decisions. He resides in Norfolk, Nebraska with his wife, Katie, where they are raising their four boys.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.  Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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