While this post is primarily about periodic fixed expenses, it’s essential we understand the three main types of expenses. By understanding the main expense categories, we can better prepare a spending plan that aligns with our financial goals.
The Three Types Of Expenses
These are the three main different types of expenses:
As you can imagine, no two people have the same expenses. A single mother raising three children is going to have different costs than a married couple without children. While each family unit has unique wants and needs, their expenses will still fall into periodic, variable, and monthly fixed categories.
Fixed expenses are recurring expenses that come in monthly intervals. These expenses are generally the same each month and are reliably static.
Examples of fixed expenses are:
- Rent or mortgage
- Vehicle payments
- Internet services bill
- Phone bill
- Cable bill
- Monthly subscriptions
- Other annual registrations
Period Fixed Expenses
Periodic fixed expenses are like regular fixed expenses (think mortgage, electricity, etc.), only they do not come every month. They are required to be paid every three months or even every six months. They include auto insurance, life insurance, and other fixed expense you pay for in regular intervals other than monthly.
Examples of periodic fixed expenses are:
- Tuition and school fees
- Life insurance premiums
- Property taxes
- Club dues or association fees
- School books
- School supplies like stationery
- Planned vehicle maintenance and service
- Car emission testing and registration
- Car insurance if you pay for it annually or semi-annually
- Holiday season expenses
- Kids school and summer trips
- Deposits for a future down payment
- Business taxes if you’re self-employed
- Quarterly business expenses
- Pet care
Variable expenses, also known as flexible expenses or variable costs, are different amounts each month or every couple of months. They largely coincide with your monthly spending patterns. Variable expenses may include groceries or your occasional party attendance.
Examples of variable expenses are:
- Utility bills that are not fixed each month
- Credit card payments
- Unexpected vehicle maintenance costs
- Groceries (if not on a fixed budget)
- Entertainment expenses (if not a fixed monthly item)
- Unexpected expenses
- Certain loan payments
- School clothes (unless budgeted)
- Various business expenses
- Travel expenses like work trips and visiting relatives
- Other monthly debt payments
Four Ways To Prepare For Periodic Fixed Expenses
Periodic fixed expenses are easy to prepare for because they arrive in predictable intervals and consistent amounts.
Due to the nature of periodic fixed expenses, most of them are essential, making it difficult to cut them from your budget. It would not make sense to cut your car service or oil change. Similarly, you cannot avoid financial obligations like paying your taxes if you own a business.
Instead, you need to be very diligent while budgeting and preparing for your periodic expenses so they don’t sneak up on you when you’re not financially ready to pay for them. Managing your recurring costs involves treating them like the fixed expenses.
If you have to pay $100 every three months for your car service, then you need to save $34 every month, so you have enough money available when the periodic fixed expense arrives.
1. Identify Previous Spending Patterns
The easiest way to identify the best way to budget your period expenses is to look over your expenses from the previous year. Identify which expenses you would categorize as periodic fixed expenses from the examples above. This may be a great time to identify bad spending habits.
2. Add Your Periodic Fixed Expenses
For the previous year, add up how much you spent on each periodic expense. For instance, if you pay for life insurance once a year, no calculation is needed. However, if you pay your vehicle insurance every six months, add up the total you spent on vehicle insurance over the past year.
Each expense should have a separate yearly total assigned to it.
3. Find The Monthly Average
To prepare for these periodic expenses, take each expense total and divide it by 12 (for each month of the year). Doing this will identify how much you should budget each month for that particular periodic fixed expense.
4. Separate Your Periodic Expenses
From your total monthly income, set money aside each month for each periodic fixed expense in a separate account or cash envelope. This will help you save up each month, so when the time comes to pay the periodic bill, you will have the money set aside to pay it in full.
Reducing Your Periodic And Fixed Expenses
If you are trying to reduce your periodic financial outflow, you need to evaluate your recurring expenses and how necessary they are in your life. Unlike eliminating and reducing variable costs, which have a minimal effect on your monthly budget, if you can find a way to reduce your periodic fixed expenses, you can make significant long-term changes to your financial future.
One of the tips savvy financial experts use is to shop around for vehicle insurance every couple of years to ensure you are still getting the best rate. Establishing financial habits that constantly look to reduce overall expenses can create long-term wealth due to sound spending discipline principles.
When you reduce your periodic fixed expenses, you end up reducing your overall cost of living.
Here are some of the ways you can manage your expenses and improve your financial health.
1. Pay Down Your Debt
Debts are usually categorized as monthly fixed expenses. Think of it this way; if you have a loan you are paying down each month, you will need to pay a specific amount of money for a period of time. So if you can eliminate the debt by paying it off, you have more freedom to spend your hard-earned money on other essential things that bring value to your life.
Every time you pay off a debt, you reduce the amount of money that goes to a fixed expense which can be used for other periodic expenses.
2. Shop For Cheaper Insurance Premiums
It doesn’t matter what insurance payment you make, whether monthly, semi-annually or annually. This periodic fixed expense can slowly increase over time, and it’s necessary to regularly shop around for cheaper insurance premiums.
If you can reduce your home and vehicle insurance premiums, you can reduce your periodic and monthly expenses. Cutting down on these costs will allow you to save and have more cash at your disposal for emergencies and other financial goals.
Don’t cut down on essential items.
For instance, health insurance is critical because buying medicine or seeking medical care without a plan is very expensive. For this, you need to look for a suitable deal that covers your whole family instead of picking out insurance coverage based solely on the monthly expense.
3. Reduce Your Cell Phone Plan
Cell phone plans can be ridiculously high. The good thing is there are dozens of options available in the market. Although most phone plans are paid for every month, some companies allow you to pre-pay for phone service in three to six months increments.
By paying in advance, companies that enable this option usually discount your service for the accelerated payment.
Think outside of the box when looking for ways to impact your fixed expenses. By being creative, you may be able to save hundreds of dollars each year. Some of the cell phone data plans are extremely expensive, especially if you have a good Wi-Fi connection at home and in the office.
By connecting directly to your Wi-Fi, you can use applications like FaceTime, Google Duos, or even Skype to communicate with people without touching any of your data limits. Utilizing Wi-Fi can allow you to decrease the size of your mobile data plan significantly.
4. Reduce Your Rent Or Mortgage
If you feel like your fixed expenses are on the higher side and affect your quality of life, you need to look for ways to reduce your overall cost of living. If you have a mortgage, you can sell your current house and buy a smaller one to reduce your mortgage. This is commonly referred to as downsizing.
Keep in mind, your housing expenses will be a monthly fixed expense unless you are renting, and your landlord allows you to pay for several months in advance, thereby making it a periodic fixed expense. However, most contracts are set up for monthly fixed payments.
Even though this article is primarily about periodic fixed expenses, it’s essential to understand how reducing the cost of your fixed expenses affects your periodic expenses.
For example, depending on the housing market and the city you live in, renting may be much more expensive than purchasing a home. If you can buy a house or build one, you may be able to reduce your monthly expenses by more than 25%, depending on where you are renting.
By focusing on ways to reduce this expense, you can significantly influence your overall quality of life.
If you’re currently renting, it may be your best option to start saving for a down payment on a home. Owning real estate is not only a good investment; it can also save you money.
For the best chance of getting your rental security deposit back when you finally have enough for a down payment, take care of your rental as you would your own property. This includes patching any holes in the walls and keeping up with general maintenance and cleaning.
5. Buy In Bulk
Most of the things that are classified as periodic fixed expenses are affected by time. This includes things like holidays and school fees. If you can buy group deals for your summer holidays or vacations, you have a better chance of saving money.
By purchasing the holiday deals off-season, you get better hotel prices, and travel expenses are usually reduced. For things like stationery and school books, buying them in the off-season can save you a bunch of money rather than purchasing the same items right before the school year begins.
The key to saving up on your periodic fixed expenses is to know when to make certain purchases you know you will need to make in the future.
You may have a specific monthly food budget, but the items you purchase usually vary each trip. Because of this, most trips to the grocery store result in different expenses that vary from month to month.
An overall grocery budget may fall under the fixed expense category, but the actual food expenses vary with each trip.
If you follow your food budget, your shopping trips may vary by a few dollars from one purchase to the next. However, most of the time, you can easily predict or plan how much you will spend. Because they are predictable, you can create a baseline for your periodic fixed expenses by estimating what you pay for or buy around the same time.
The easiest way to monitor your recurring fixed payments is by budgeting an amount relevant to the last time you paid for those specific expenses. That way, you will more easily budget for your periodic expenses.
6. Stick To Your Budget
Human beings are creatures of habit. If you enjoy your occasional beer at the bar after work before going home, you can plan your budget around this expense. However, there are random plans that come out of nowhere, and sometimes you feel the urge to splurge.
If this happens, you need to budget for the variable and know how it will affect your fixed or periodic budgets.
For example, a co-worker may invite you to lunch when you were planning on eating what you packed for lunch.
7. Take Advantage Of Company Benefits
Some companies offer benefits employees are unaware of. If you work in an office where they provide snacks and meals, you can save on lunch expenses by scaling back how much you are spending by eating out.
Some companies also negotiate good insurance deals for their employees, making it easier and cheaper for you to get your health and life insurance through your workplace.
For instance, my current employer offers term life insurance to employees at a discounted rate compared to what I can buy it for from an insurance company.
In other cases, some offices offer mileage and tuition reimbursements employees may not be aware of. Be sure to look through your employee benefits package information to see if any hidden benefits can save you money.
Bank Account Strategies
Your savings account needs to be separate from the account that is used to pay your bills. By having multiple accounts, you can move money around to specific locations based on your intent.
Separate Accounts For Separate Objectives
For instance, you should have an emergency savings fund that is separate from your checking account. You should also have a long-term savings account as you build up your six months of living expenses to protect yourself against unexpected financial emergencies.
For you to simplify your variable and periodic fixed expenses, you need to have financial discipline. One of the things mentioned above is planning for these expenses as a monthly expense. By budgeting for these expenses monthly, you calculate what it would cost you as a monthly average.
For example, groceries are a variable expense that you can calculate with averages. Some of the food people eat is routine. You can have specific meals on specific days.
If you pay for your gym membership quarterly, you can ask for discounts by paying your gym membership yearly. Just because you can save money by paying a year in advance, this doesn’t mean you can’t budget monthly for the yearly expense.
Don’t Neglect Your Savings Account
One common spending plan failure is neglecting your savings account. A financially disciplined person should have significant savings to avoid debt when an unexpected monetary need arises. Your monthly savings payments should be stable each month by paying yourself first.
Savings are essential in case you lose your job or want to move from corporate employment to self-employment. Savings will help you maintain the same lifestyle for a period before you can get back on your feet or fully adjust to the new normal.
For example, when the pandemic struck early in 2020, the people who had invested in savings knew they could fall back to their savings accounts to help them stay afloat if they lost their job.
During the pandemic, many people’s salaries decreased while others lost their jobs. Stimulus checks alone have not been enough to keep people above water if they didn’t have a healthy savings account. Savings as an expense help you avoid problems from borrowing money and paying for necessities with credit cards.
Three Benefits Of Budgeting For Periodic Fixed Expenses
Creating a spending plan for your periodic fixed expenses offers three unique benefits to your personal and financial life.
1. Reduces Overall Stress
Financial struggles and money problems are some of the top stressors in our lives. By budgeting in your periodic expenses, you are better prepared to pay them when they show up without surprising you at the last minute.
2. Averages The Costs Into Smaller Amounts
Rather than facing a large bill once or twice a year, budgeting these items into smaller monthly payments is much less stressful.
3. Identifying Overall Costs
Often periodic fixed expenses can be higher than they should if we compared them to other alternatives. For instance, if we only see a vehicle insurance payment twice a year, we can easily neglect shopping around for insurance until it is too late.
Looking at our periodic fixed expenses every month will help us focus on saving money on expenses that significantly increase our costs.
What are periodic fixed expenses?
Periodic fixed expenses are regular fixed expenses that occur once every few months or once a year.
What is an example of a periodic fixed expense?
–Tuition and school fees
–Life insurance premiums
–Club dues or association fees
–School supplies like stationery
–Planned vehicle maintenance and service
–Car emission testing and registration
–Car insurance if you pay for it annually or semi-annually
–Holiday season expenses
–Kids school and summer trips
–Deposits for a future down payment
–Business taxes if you’re self-employed
–Quarterly business expenses