Understanding the Three Major Types of Expenses

There are three major types of expenses we all pay: fixed, variable, and periodic. Understanding the difference is important when creating your budget. 

Fixed expenses

Fixed expenses are payments we have very little control over as they represent a legal obligation to pay, such as your rent or mortgage. You might also have a car loan or other type of secured loan.  

These expenses occur at predictable intervals, typically monthly. Fixed expenses are typically easy to predict and while covering them can be a financial challenge, they're never a surprise and are easy entries in your budget spreadsheet.

Periodic expenses

Periodic expenses are a little more challenging to budget for. Similar to fixed expenses, we have little control over periodic expenses but where fixed expenses typically recur on the same date every month, periodic ones are what you could call “expected surprise” expenses.   

These are the bills that we have to pay that come in quarterly or semi-annually that we often forget about. For example, if you're a car owner, once a year you likely need to pay for both an inspection and an annual registration. The costs may not change much year to year, but because it's not something you pay frequently, it can be easy to forget (and hard to budget for).

The best way to ensure there is money in your bank account for these types of expenses is to plan a portion of them into each month of your budget.

Variable expenses

Variable expenses are also known as discretionary expenses. While they can be challenging to budget for, this is where you have the most control. These are the expenses that we can influence with our behaviors.

Variable expenses are the money you spend on food, clothing, and entertainment. The challenge to budgeting these expenses is that they are rarely exactly the same every month and they don't typically occur on the same day of each month.  

Budgeting for variable expenses requires gaining a good understanding of where your money goes after you've paid your fixed and periodic expenses. The best way to find the answer to this is to track your expenses for a few months. We learn a lot about our spending habits and variable expenses when we track our activity for just a few weeks.

Need help making the most of your budget? MMI offers free financial counseling 24/7, online and over the phone.