You often find yourself in a situation where you don’t have enough money to finance something unexpected or don’t manage to save the amount you aimed for. There are probably various reasons, but one of the most common is the inefficient balancing of fixed and variable expenses.
You can achieve financial flexibility with the right mindset and knowledge of balancing fixed expenses with variable costs. If you’re not sure where to start — this article is the best place to start.
Let’s dive in!
What are Fixed Expenses?
Before you learn how to balance your monthly budget, you must know what fixed costs are.
Fixed expenses are considered regular expenses that cost the same amount and are paid on a regular basis—weekly, monthly, quarterly, or yearly. Creating a budget for fixed expenses is relatively easy because they are predictable and don’t easily change.
Usual examples of fixed expenses in every household include:
- Mortgage or rent payments;
- Real estate taxes;
- Car payments;
- Loan payments;
- Property taxes;
- Phone and utility bills;
- Childcare expenses;
- Tuition fees;
- Gym membership;
- Health insurance.
All of these examples of fixed expenses have something in common: they are constant. Even though there are ways to change these expenses, that cannot be done without major lifestyle transformations.
For example, you could theoretically revise your monthly mortgage payment by refinancing your loan or by appealing your property tax assessment. But this is not an easy switch.
The same applies to rent payments. Theoretically, you can move to a cheaper home or get a roommate, which means a completely different lifestyle.
What people often forget to calculate while creating a budget plan is a fixed cost that doesn’t occur monthly. Some fixed costs are known as “periodic fixed expenses,” which occur quarterly or annually. Examples of fixed but periodic costs include taxes, license and permit fees, and much more.
What are Variable Expenses?
Variable expenses are a broad category of our daily expenses. This expense group differs for everyone and will depend on their lifestyle, goals, and earnings. Unlike fixed costs, variable expenses vary from month to month or even day to day.
The following are examples of variable costs:
- Groceries;
- Eating out;
- Hobbies;
- Entertainment;
- Gas;
- Personal care;
- New clothes;
- Home and car repairs;
- Medical bills.
The important distinction we need to make is between necessities and discretionary spending. Both are types of variable expenses, but there is only one similarity.
Necessities like groceries and gas are considered variable just because the amount you spend on them can easily change. How much we spend on necessities will depend not only on our personal choices but also on external factors like inflation.
On the other hand, discretionary spending isn’t an essential part of our lives, but we all enjoy it. Discretionary expenses are also part of variable expenses because they can vary from period to period.
Creating a budget for variable expenses can be a bit more challenging because they can really vary from month to month. However, it’s not impossible.
You can look at your bank accounts and see how much you have spent. It will give you a general idea of how much you should spend on each sub-category.
Also, these insights might help you avoid overspending on some things, like ordering takeout.
Business Expenses
A small business owner can use knowledge of fixed and variable expenses to determine the company’s break-even analysis. It is the number of units or dollars at which total revenues equal total costs so the company breaks even.
Fixed costs are expenses that don’t fluctuate with changes in production or sales volume. As a business owner, you can expect these fixed costs:
- Rent;
- Management salaries;
- Insurance premiums;
- Property taxes;
- Interest expenses;
- Depreciation;
- Potentially some utilities.
Examples of variable expenses for business owners include:
- Raw materials;
- Sales commissions;
- Shipping costs;
- Packaging supplies.
Balancing Fixed and Variable Costs
It’s highly recommended to establish a budgeting system that considers both fixed and variable expenses. This way, you’ll guarantee that your crucial bills are covered every month before allocating funds towards nonessential variable expenses such as dining out or entertainment.
But what is the best way to budget your income?
We all have different goals and priorities, and there is no universal answer. For some people, it’s easier to minimize their variable expenses, while for others, it’s easier to lower their fixed costs.
Here are some examples of how you can budget your earnings and see if something works for you.
The 50/30/20 Rule
The 50/30/20 budgeting rule requires splitting your expenses into three categories: needs, wants, and savings or debts. It suggests that your monthly net income should be allocated 50% to needs and necessities, 30% to nonessentials or flexible spending, and 20% to savings and debt repayment.
This strategy is great because it will help you decide what variable costs you have and what fixed costs you have. On top of that, it will be easier to see if a specific variable expense is a want or an essential expense.
We personally like and use this method but with a little adjustment. We changed this method to the 40/30/30 allocation because we wanted to prioritize our savings.
Zero-Based Budgeting
A zero-based budget rule advises that every dollar be allocated toward a specific purpose.
The main goal is that by the end of each month, your spending does not surpass your earnings, leaving you with no balance.
In other words, your income minus expenses should equal zero. This can be a good starting point for people who, at the end of the month, have a negative balance on their accounts.
But in other cases, it’s highly unlikely that this method will work. Why?
Well, our philosophy is that we should put savings and debt repayment at the top of our list of priorities. We need to be debt-free and have a good savings amount if we want to invest and make more money.
Pay Yourself First Budget
“Pay yourself first” is a name used for a monthly budget method focusing on savings goals. This strategy suggests paying fixed and variable expenses, but you must define your savings goals.
When you get your paycheck, the first thing you should do is set your goal amount for savings aside. The remaining amount is reserved for fixed costs and other variable expenses.
This method prioritizes savings, which we totally agree with. This can be really beneficial, but only if you really stick to the plan.
The problem with this budget plan is that people aren’t usually that disciplined and often tap on their savings and spend them elsewhere.
The Ultimate Way to Balance Fixed Expenses and Variable Costs
The hard truth is that being in control of your money is hard work. It requires the right mindset, discipline, and a system that works for you.
In today’s fast-paced world, balancing fixed costs with variable spending can be a challenging task, often leaving us feeling financially trapped. However, there is a strategy that stands out among the rest as the ultimate path to achieving true financial flexibility: Lifestyle Banking.
Lifestyle Banking
Lifestyle Banking is a financial strategy that utilizes a whole life insurance policy. Whole life insurance is a type of permanent life insurance that has two main features: it lasts for as long as the policyholder pays its premiums, and it builds cash value over time.
It’s important to note that the whole life insurance policy should be properly designed for Lifestyle Banking. That’s why you need to work with professionals who are experienced in this type of banking.
On top of that, you should buy your whole life insurance policy from a mutual insurance company. Mutual companies keep assets like insurance reserves, surplus, emergency funds, and dividends for the benefit and security of policyholders and their beneficiaries.
More importantly, with mutual insurers, you don’t have any risks, and if you choose wisely—your insurance company will pay you dividends.
At its core, Lifestyle Banking encourages individuals to set up their personal banking system, leveraging the power of cash-value life insurance policies. The main goal is to fund your purchases and investments instead of relying on traditional banks or lenders.
How to Use Lifestyle Banking for Balancing Expenses
With Lifestyle Banking, you can strike a delicate balance between fixed expenses and variable expenses. What’s more, you won’t have to choose whether to save money on fixed or variable expenses because you will be able to finance everything you need.
Still, it is crucial to emphasize that adopting Lifestyle Banking is no walk in the park. It demands the right mindset, as it requires a shift in perspective from being a consumer to becoming a shrewd investor in one’s own financial future.
It necessitates discipline, as individuals must commit to consistently contributing to their cash value policies and resist the temptation to dip into these funds for frivolous expenses.
Also, it involves a lot of work, as one needs to educate themselves thoroughly about the intricacies of the concept, work closely with a knowledgeable financial advisor, and actively manage their policy to ensure optimal results.
Achieving Financial Flexibility
Yet, for those who are willing to put in the effort and embrace the challenges, Lifestyle Banking offers unparalleled financial flexibility.
By developing a cash value policy, individuals gain access to a versatile financial resource that can be tapped into during emergencies, used to finance major purchases or investments, or even passed down as a legacy for future generations.
The ability to become your own source of financing not only grants you freedom from the limitations imposed by traditional banks but also provides the opportunity to generate wealth and achieve financial goals on your own terms.
Lifestyle Banking offers a compelling pathway to striking a harmonious balance between fixed expenses and variable spending while paving the way to financial flexibility.
However, it is essential to approach this strategy with the right mindset, unwavering discipline, and a willingness to put in the necessary work.
Join Our #PYF Challenge
By embarking on this journey, you are taking a significant step towards reclaiming control over your financial future and unlocking the potential to build lasting wealth.
But before you buy a whole life insurance policy and start your personal banking system, it is crucial to eliminate bad habits in your financial life.
The biggest issue most Americans face is saving. Around 57% of Americans can’t cover a $1,000 emergency.
And it truly isn’t their fault. No one teaches us how to save, how to manage our money, or how to achieve our financial goals.
That is why we decided to turn the page and start again.
We offer you an exclusive opportunity to join our Pay Yourself First challenge, where you will learn the fundamentals of saving money.
It’s time to break the circle of Americans who don’t know how to save and manage money.
Join our Pay Yourself First challenge, and you will learn insightful ways of saving money and using it more wisely.
What’s more, during the four weeks of the challenge, you will save $500, which is the first step in buying your whole life insurance policy and starting your own banking system.
Don’t wait; now is the perfect time for smart financial choices!