The terms fixed and variable costs are often used toward a company when detailing its expenses. But just like a company, we too have expenses, and breaking them down can allow us to identify which are really necessary and remove the unwanted ones. To put it shortly, a variable cost is an expense that fluctuates in amount, whereas a fixed cost remains constant throughout a certain period.
It is highly important to understand the way these different types of expenses can affect you either at a corporate level or personal level in order to effectively manage your money. If you would like to learn other ways to manage your money head here.
Fixed costs in relation to company incurred expenses are the expenses that occur regardless of how much or how little goods or services are produced. Most common fixed costs for businesses tend to relate to things like building rent, salaries, machinery rent, prepaid insurance expenses etc.
Fixed costs at a personal scale will often be categorized as ‘necessities’, these expenses cannot be changed easily and generally occur over a weekly, fortnightly, monthly or yearly basis. Although these expenses cannot be changed easily, budgeting for them can be seen as a lot easier due to their consistency compared to variable costs.
Cutting Down Fixed Costs
Although as we stated fixed costs do not change, that does not necessarily mean they are set in stone. In fact cutting down your fixed costs can be quite an effective strategy towards managing your money. However, doing this can be a bit more difficult and can involve a lot more sacrifice then regular savers are willing to give up.
An example of this can include, selling your car, removing all car insurance payments as well as registration payments, or downsizing your living area, resulting in less rent expenses. As you can see both of these sacrifices would clear up a fairly large sum of your expenses however are seen as much more intense saving options and take a bit more time than regular variable cost cut downs.
Some examples of Fixed Costs are:
- Property Rent
- Health Insurance
- Car Insurance
- Mortgage Payments
- Income Taxes (If you maintain a fixed wage)
At a business scale, variable costs depend on the number of goods or services produced, it’s the expenses that are incurred while creating or performing the good or service. When production volume goes up, the costs will follow and when production volume goes down the costs do too. Variable costs will often be unique to the business structure, meaning they will depend largely on what the businesses outputs are.
When discussing variable costs towards your personal finances it is a bit different, these are the expenses you incur over a measured period of time that are subject to change often based on your decisions. While most variable expenses fall under the category of discretionary spending some can still be considered ‘necessities’.
Cutting Down Variable Costs
The good thing about variable costs is that they tend to be the easiest for people to cut down, and more often than not it subjects you to little to no sacrifice, but only once you make the full commitment to cut these expenses out will you fully be able to manage your money. You see, when removing these variable expenses from your daily lives, it involves making regular decisions, a decision to indulge or to save. Now for some, this may seem easy, that skipping that luxurious restaurant dinner is not a problem, however for others it’s not so easy.
Once you have made the decision to cut your expenses, go through your budget and pick out the ones you really believe you can go without, this might not mean completely eliminating them but even marginally reducing them. For example you may choose to get the bus to work instead of driving, saving you that 60-80 dollar tank of gas each week.
Some examples of Variable Costs are:
- Gas Money spent eating out
- Clothes Shopping
Essentially, fixed and variable costs are two different types of expenses any one person incurs, no matter if you’re rich or poor, you will have at least 1 type of each of these expenses. Allowing yourself to understand these expenses can be a huge step when it comes to managing your money effectively, helping achieve your financial goals.