Budgeting Step 3: Total Annual Fixed Expenses
I have researched budgeting terminology a fair bit over the years. What I have come to realise is that there is a lot unnecessary accounting and financial jargon out there. In terms of household budgeting, the language you use needs to be personal. Here is my two cents worth on the topic of fixed expenses.
Fixed expenses can be:
‘Costs that do not change regardless of extra sales. An example of this might be business utilities and rent’
Or in relation to household budgeting fixed expense can be:
‘Bills that need to be paid on a regular and defined basis according to the household budget, yet may vary in cost’
When writing your first household budget, it is helpful to find resources that are based on household budgeting in particular. To set up a budget that takes into account the ups and downs of family life, you have to make budgeting work for you and your family. Business accounting resources are not always the most helpful for learning about household budgeting. They are formal and based on the potential success or failure of a business. That of course can be personal but its not the same as household budgeting. This blog post aims to help you to decide what you will classify as a fixed expense in your household budget. Take this list as some inspiration for your own budget.
Household Budgeting Is Personal
In my household budget I put groceries into the fixed household expense category. I set a fixed budget amount and stick to it (fairly well) every month. This kind of expense in the business world would probably be classed as a variable expense. It is true that without planning, groceries would be a variable expense. I plan my meals, batch cook and practice zero waste, so that allows me to treat this typically variable expense as fixed. If I allowed my grocery budget to be a variable expense I’d get into all sorts of budgetary trouble! So, in my personal household budget, things that look like variable expenses to others, I sometimes class as fixed expenses. You can do this too in your household budget if you wish.
Here are some expenses for you to consider. Will you make them fixed or variable in your budget?
1.Rent, Mortgage Or House Payment.
One of the first examples of fixed expenses that most people usually discuss is housing. Whether you have a mortgage or a rental agreement, this is likely to be your largest fixed expense. It is unlikely that a sudden increase in the cost of housing could occur without warning for most people. For this reason, I class housing payments as a fixed expense in household budgeting.
This is a fixed expense. While it is possible for property tax to increase or decrease over time, it is unlikely that it would change within a tax year.
3.Internet, Phone, TV and Streaming Services.
The cost and availability of these services can vary in price and quality. This heavily depends on location for many people. While you may need to have these services for a variety of reasons, treat them as a fixed expense for the period that you are committed to a contract for these services. If you find cheaper alternatives that meet your needs later in the year, adjust your budget accordingly and continue to treat them as fixed expenses.
4.Heat and Electricity.
Some providers allow you to pay a fixed sum each month for your utilities based on the monthly average of last years consumption. This can help you to budget more easily throughout the year. Be aware that if your usage goes over the amount that you have paid in a year you will be liable to pay that overage in the following year.
If you have a prepay meter for your gas and electricity, you can top up the meter a fixed amount each month. In this way you may treat your utilities as a fixed expense.
Car insurance can fluctuate significantly each year. However, car insurance is due at the same time each year. For that reason I treat this as a fixed annual expense. I set up a sinking fund a few months before it is due and save up the amount I assume it will be. I know it has to be paid and whether it is a little more or a little less is not relevant to how I budget.
Car tax is not likely to change without significant warning therefore it is treated as a fixed expense in my household budget.
7.Waste Management and Water Costs.
This cost does not fluctuate where I live. You may have fluctuating costs in relation to these services. If you wish to add them to your budget as a part of your total annual fixed expenses, overestimate the potential cost. If you have money leftover from overestimating the cost, just roll it over to the next month’s budget.
I have a 10 year term life policy so I know pretty much the cost of that each year. I pay it once a year but if you pay it monthly, it is very likely that it is the same amount each month hence, it is a fixed expense.
9.Car Payment or Transport Costs.
Whether you drive your own car or use public transport you may have a fixed associated cost. Car payments are likely to be the same throughout the period unless there is a balloon payment at the end of a lease agreement. In that case, if one was hoping to keep their lease car, they should treat the monthly payment as a fixed expense and treat the balloon payment as as sinking fund.
If you live in an area where you can avail of travel cards or season travel tickets, it may be worth considering if they would be more economical. I have my car payment in classed as a fixed expense.
10.Minimum Debt Repayments.
Minimum debt repayments can be treated as a part of your total annual fixed expenses. If you are struggling to pay them each month, make sure you are prioritising them by putting them in as a fixed expenses so that they don’t slip your mind.
11.Education and Extracurricular Activities.
While education is free in many countries, there can be associated costs. Chosen extracurricular activities such as sports or dancing can incur monthly fees along with variable expenses. Some children will require extra tutoring at times and that comes at a cost too. For these important and regular activities, treat them as a fixed expense for the duration of the period you have committed to. You may also consider having a sinking fund for the variable expenses over and above the fixed monthly costs.
It is personal what you include in your fixed expenses category. It is common to mistakenly assume that because something might not be the exact same cost each month that it is a variable expense. In household budgeting variable expenses often refer to those things you can choose to buy if you wish, but you don’t have to to keep the roof over your head!