A typical first step in developing a budget is to do an exercise where you identify your fixed and variable expenses. Fixed expenses are defined as expenses that do not change month to month, whereas variable can fluctuate. Fixed expenses also tend to be, but are not always, “needs.” In this bucket we would put things like mortgage or rent, insurance, and car payments. Variable expenses are defined as expenses which can fluctuate month to month. Variable expenses also tend to be, but are not always, “wants.” In this category we would put entertainment, clothing, and vacation.
The tricky part is that not all expenses fit so neatly into one of two categories. Some expenses may be variable but are needs. For example, utility bills can fluctuate month to month based on usage but these are a necessary expense, or a need. Some expenses may be fixed but are wants. An example would be a monthly subscription for a magazine.
What we are going to focus on is your monthly bills which are necessary and tend to be fixed every month, or close to the same amount. These are the expenses that routinely get ignored because the perception is they can’t be changed. Wrong! Let’s look at a list. I particularly get excited about the last one in the list.
Insurance is one of those funny things – we pay for it, but we hope we never have to use it. Your insurance needs will depend on your lifestyle and possessions. Have a car? Need car insurance. Have a home? Need home insurance. Rent? Need tenant insurance. Own an expensive piece of sporting equipment or jewellery? You’ll want to ensure that too. How about your family? Need life insurance. There are a couple of ways to save on insurance:
- Combine products: combining your car and home insurance for example will give you the best quote. It’s also convenient to deal with fewer companies.
- Research discounts: recently graduated from a professional program? You may be eligible for a discount. Have an excellent driving record? Same thing.
- Pay annually: some providers will apply a discount if you agree to pay your premiums in full once per year, rather than in 12 monthly payments. If you can handle this from a cash flow perspective, it will save you money in the long run.
- Get multiple quotes: don’t take the first quote and run with it. Explore your options, however, makes sure you are comparing similar plans. A quote for one insurance policy may be cheaper than another because the deductible is higher or because there are several exclusions. Make sure to do your homework.
Utilities (Water, Electricity, Cable, Internet, Phone)
There is alot in this category so I’m going to try and keep it high level. An additional complication is that depending on where you live you may have more options. For example, in Canada we don’t have as many options for cell phone providers (although it’s getting better), so we pay more than our European counterparts.
Essentially it all boils down to two things. One, understanding that you have choice. Two, understanding that your needs change. Maybe a new business has entered the market and is offering discounted introductory pricing. Maybe you’ve been locked into a long term contract at a fixed price for water or heat and have noticed that prices have come down and it’s time to renegotiate or enter into a floating price arrangement. If your teenage son has grown up and left, maybe you don’t need the premium sports cable package or ultra high speed internet. If your city provides green energy incentives, maybe it’s time to install some solar panels for your electricity needs. Maybe after reviewing your bills you realize the amount you pay for electricity is ridiculous and you need to install energy efficient light bulbs (in which case you should refer to my post about interesting ways to spend your tax return).
I have left this one as the last item because it requires possibly the most effort. Our housing expense is a contract, either with a bank or landlord, to pay a certain amount per month for a certain number of years. Although there is a contract involved, that does not mean change is impossible. If you are renting, look at what is happening in the market. If prices have come down, it may be beneficial for you to break your lease, pay the penalty, and obtain a new place for a reduced rent. (As a landlord, I cringe typing that, but it’s true). If you own your home, add a reminder in your phone for six months to one year prior to the end of your mortgage term. Start looking at interest rates – if you notice they have dropped significantly consider a blend and extend arrangement with your bank. This would reduce your monthly payment, and extend the contract, essentially re-mortgaging 6 months earlier than planned. Lastly regardless of whether you own your home or rent, look at your living arrangements. Are you living alone? Could you benefit from the income that a room mate would bring? Shared living accommodation is not for everyone but it can make the most significant impact to your finances.
I hope this has helped you understand how to look at your fixed expenses a little bit differently. It’s so easy to watch these things roll over into another year and auto renew, without any thought as to whether we the arrangement is still working for us.
How do you save money on “fixed”expenses?