What Are Variable Expenses? How They Affect Your Budget and How You Can Reduce Them
Have you ever wondered how your ‘perfectly planned budget’ suddenly goes out of shape? It doesn’t matter if you’re managing a large enterprise or a monthly budget for family expenses, Variable expenses can ruin even the best budgets.
Sometimes you may encounter recurring variable expenses every month. These variable expenses have fluctuating costs, and they are pretty unpredictable too. As a result, planning a budget can be a bit of a nightmare.
So, is there a way to get around variable expenses? Unlike fixed expense budgeting, variable costs don’t operate on a fixed formula. It makes them even harder to track and account for. However, some tips and tricks can help you manage your monthly budgets more effectively.
What Are Variable Expenses?
Simply put, any expense which does not have a fixed value can be called a variable expense. These expenses can vary in proportion to the monthly activities and choices that you make as an individual.
According to accounting consultant Harold Averkamp, “An expense is a variable expense when its total amount changes in proportion to the change in sales, production, or some other activity.”
In contrast, fixed expenses like cell phone bills, rent or tuition payments take a fixed portion of your monthly budget.
Examples of Variable Expenses
Utility payments, fuel, automobile expenses and utility bills are some examples of variable expenses. Generally, these expenses don’t come with too much of a surprise.
However, if your car broke down somewhere, the repair cost might surprise you. Likewise, if you don’t have insurance and you meet with an accident, the hospital bill can be a hefty variable expense.
Some other variable expenses could be your property maintenance costs, eating out or entertainment.
How Variable Expenses Can Affect Your Budget
Variable expenses can sometimes prove more costly than your regular spending. However, they are also easier to adjust because you will automatically cut down your costs. For instance, if your house needs costly emergency maintenance, it can create a gap in your budget that leads you to manage your utility expenses or fuel expenses more efficiently for that month.
This is where the inflexibility of fixed expenses can actually be a disadvantage. You need to pay them no matter what. They don’t change regardless of whatever “accidents” or relief you may encounter.
Let’s say your average electricity bill is around $200 per month. A sudden heatwave might force you to add a few extra hours of cooling that may account for up to 50% addition to your average monthly bill. If the overhead exceeds your budget considerably, you might have to cut down on other expenses like entertainment or groceries.
On the flip side, if the temperature suddenly drops, it will lower your bill for the month. In this case, you can treat yourself to a night out or save the amount for the future.
How Do You Manage Variable Expenses?
Variable expenses are a common occurrence and almost impossible to avoid entirely, so how do you cut down your variable expenses? The following tips can help.
Know Where Your Money Is Going
As a budget maker, you must keep an eye on the tiniest of your monthly expenses. Before you start cutting costs, make sure to know where all of your money is going. Failure to account for every dollar may lead to unnoticed leakages in your expenses, forcing you to cut down on the essentials.
When you have a clear picture, divide your budget through a 50/30/20 scheme. Allocate half of your budget for the essentials, like groceries and bills. Dedicate 30% to your wants and luxury items, and the remaining 20% to debt payments and future savings.
According to Forbes expert Kelly Anne Smith, “Building a budget is essential to creating a strong financial plan.” She believes that the 50/30/20 is an approachable method, especially for starters.
Determine Your Average Variable Expenses
Analyzing the average expense on your variable expenses is a great way to figure out your annual spending. Calculate the average across a three-year period to understand the true weight of each expenditure. When you’re done, highlight the highest average amount from each year for each expense to use as a guide in making a more effective budget.
Add Buffers to Your Budget
After analyzing the variable expense cost for every year, add buffers to each expense. Ideally, add 3 to 5 percent for each buffer to be on the safe side. If you’re extra careful, a buffer of 10% is also an option.
Keep Monthly Track
Tracking each variable expense every month can be pretty helpful. After monitoring, compare costs across the previous months. Use some budgeting software for expense tracking. It can give you a detailed profit or loss report and compare each variable expense separately.
Forbes Advisor Brett Holzhauer believes that budgeting apps are the way forward for consumers, especially in the U.S: “As U.S. consumers continue to grapple with the financial uncertainties caused by more than a year of pandemic economic disruptions, budgeting has become top of mind for many. While there is no shame in using a handwritten budget, budgeting apps have become a popular way to track spending and savings habits.”
Assessing the variable expenses is a recursive exercise. Ideally, it would be best if you did it every year to maintain a consistent approach. It helps you understand the areas to focus on in the future and what expenses you can afford to cut down.
Variable expenses are unignorable essentials for most of us. However, if you understand their impact and take necessary action, addressing these expenses is not that complicated.
If you are well prepared, you will always be able to handle variable expenses in your business and personal life.
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