You probably know how much your mortgage or rent, car payments, and gym membership will cost you each month. These are your fixed costs; they stay the same month to month. The second kind of costs to consider are your variable expenses.
What is a variable expense? You can define variable expenses as the costs that change month to month, depending on quantity or usage. To identify the variable expenses in your budget, take a look at your last 3-6 months of spending and identify which categories are consistent, and which change! The categories that change are your variable expenses and they can make or break your monthly budget. Learning how to budget for variable expenses is an important skill that can help you feel more financially prepared for whatever life throws at you.
Here’s how we recommend using Simple Expenses and other budgeting tools to help keep your budget on track!
How to plan expenses: fixed vs variable expenses
The key to establishing a realistic, workable budget is to budget for all of your fixed and variable costs.
First, let’s talk about your fixed costs. These are all the bills that stay the same month to month.
Examples of fixed expenses include:
- Rent or mortgage payments
- Car payments
- Car insurance premiums
- Life insurance premiums
- Phone payments
- Gym/wellness memberships
- Student loan payments (if you pay monthly)
- Some utilities
- Health insurance
Of course, there are other essentials that aren’t listed above - like groceries - that you also need to include in your monthly budget. They aren’t fixed, but you probably would like them to remain as consistent as possible so you can stay on budget.
Variable expenses can include all of those routine purchases you make throughout the month that aren’t paid on a regular schedule.
Examples of variable expenses include:
- Dining out
- Water bill
- Phone data plan (if not unlimited)
- Costs of pet ownership
- Credit cards
- Recurring doctor or therapy co-pays
- Prescription costs
- Daily coffee or lunches out
To figure out how much to budget for each of these Expenses, you’ll want to pull out a piece of paper. List of all of the fixed and variable Expenses you can think of. Then, it’s time to start figuring out how much to budget for each of them so you can set them up as Expenses in your Simple Account.
Budgeting for truly fixed Expenses
For the fixed expenses, this process will be easy. These are the expenses that do not change month to month. If you pay $60 for your phone data plan each month, then write $60 per month. Create an Expense in Simple to set aside $60 each month by whenever your bill is due. Then, log into your provider account and set up automatic payments so you don’t have to remember to pay this bill manually each month.
Budgeting for Expenses that aren’t paid monthly
What about those bills you only pay a few times a year? For example, you might choose to pre-pay for your car insurance three months at a time to get a discounted rate. The exact total you spend might vary by 5-10%, but you can approximate how much to set aside and adjust as needed.
Budgeting for these expenses in Simple is easy. Just create your Expense and set your target date to whenever the bill is due. We’ll help you save the right amount each time you get paid so that you have enough money available when you need it.
Budgeting for (fairly consistent but) variable Expenses
Figuring out the budget for your variable expenses will require a little more math (but don’t worry, that’s what phones are for!). Choose one to start with - let’s say groceries. Look at your bank account history for the past 3-6 months and add up all of the grocery transactions from each month (the more data, the better!).
If your grocery spending tends to stay fairly consistent month to month, then budgeting for groceries should be fairly simple: Add up the total you’ve spent and divide it by the number of months of data you collected. This will give you your average monthly cost of groceries.
If this number keeps you within your overall monthly budget, then use it as your grocery budget! If it’s a little more than you’d like to be spending on groceries (or whatever spending category you’re examining), choose a lower number to use as your target budget.
Budgeting for truly variable expenses
So we’ve covered fixed expenses and expenses that don’t vary that much - but what about those monthly expenses that are really different every month?
We’ll use healthcare costs as an example. Some months, you might spend $8 on your prescription, and that’s it. Other months, you might develop a little toothache, that turns into a dental appointment, that turns into a root canal, that turns into a bunch of unplanned expenses.
Here are a few steps you can take to budget for these types of variable expenses.
Budget a fixed amount each month in an Expense
If you have some expenses in a specific category each month, but the total varies month to month, you can still use Expenses to stay on budget.
Using the healthcare example, let’s say you’ve spent between $50-100 each month on healthcare costs in the past 12 months. You know you’ll need to budget at least $50 for that Expense most months, and that some months you’ll need up to $100.
You might consider budgeting $75 for your Healthcare Expense each month, and letting whatever is left at the end of each month stay in that Expense. This way, you’ll be covered for the cheaper months, and have a little cushion to use toward the more expensive months.
Set up an “Account Buffer” Goal to cover small expense fluctuations
Sometimes, even with a bit of a cushion, you’ll still come up short for certain expenses. This is why we recommend having an account buffer: A small stash of cash that you feel comfortable using to cover higher-than-usual bills. (You can create a separate Goal for this in Simple to keep this money separate from other funds.)
Think of an account buffer as a way to protect your long-term savings from your short-term cash needs. While your goal should be to stay within your budget each month, an account buffer lets you lend yourself a few bucks without having to dip into your longer term Savings Goals (like your Emergency Fund).
Build your Emergency Fund to cover larger unplanned costs
For those bigger unplanned expenses, you’ll want to have an Emergency Fund. An Emergency Fund is a (larger) stack of cash that you set aside for a rainy day - like if you lose your job, or if your cat needs surgery, or if your car gets a flat tire - so that unplanned life events don’t make you go into debt.
Experts recommend saving anywhere from 3-12 months of living expenses in an Emergency Fund, which sounds like a lot (because it is). But don’t be intimidated: The good news is that you can build it up slowly over time.
We’d recommend keeping your Emergency Fund somewhere where it can earn interest (like in a Simple Protected Goals Account), so it can grow even faster!
If you’re new to the savings game, start by building up your account buffer, then work on creating a separate Emergency Fund. Create some rules for when you will use your Emergency Fund, so that you aren’t tempted to use it to fund non-essential purchases.
Learn as you go!
Learning how to budget for variable expenses is a skill, and it might take some time and trial and error before you feel ‘good’ at it. But stick with it, and you’ll reach a whole new level of financial stability you never thought possible!
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