Taking control of your finances can feel overwhelming when so many of the costs in your life seem to just, happen. Budgeting flips control into your hands and allows you to understand when and where you are spending money. The two main types of costs in your budget are called fixed and variable costs. Let’s examine how to get variable costs under control because they can be unpredictable but provide short-term levers for controlling spending.
What Are Variable Costs?
Variable costs are the costs that rise and fall in proportion to the goods and services you consume. Variable costs are usually short-term and do not require a contracted amount. Variable costs fluctuate with your level of consumption and can vary from being bar tabs, flights for vacation, or purchasing a new suit for a job interview.
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Because variable costs are the easiest to control in your budget, they are often the focus during cost-cutting exercises. Variable costs are the exact opposite of fixed costs, which are long-term, and increase or decrease with your level of consumption. Controlling variable costs is up to you because they are directly correlated with your level of consumption. You are in immediate control of your variable costs, but if you don’t contain variable costs, they can balloon out of control.
Smart Tip:
The best budgeting applications highlight areas where you are overspending based on the budgeting strategy and spending allocations you have prescribed for yourself. Getting alerts based on your consumption can help illuminate areas for focus for the next month.
How Variable Costs Affect Your Budget
Creating a budget is all about providing visibility to money flowing in and out of your bank accounts. Variable costs, which make up a considerable portion of your budget, are easy to track. Although sometimes they seem to pop up from nowhere variable costs can be controlled. Because variable expenses fluctuate with your level of consumption, you have the power to curb spending quickly.
Many budgeting strategies, like the 50/20/30 method, offer suggested spending allocations. For example, in the 50/20/30 budgeting method, 50% of monthly spending goes to needs, 20% to savings and investing, and 30% to personal wants. Outside of essentials like rent, food, and transportation, all other expenses should be heavily scrutinized.
When was the last time you reviewed your spending? Understanding spending patterns will help you assess where you are overspending on variable expenses. Take your credit card and bank statements from the past 2-3 months, and tally how much you spent on variable expenses. Some of these expenses will be on essential items like groceries, gasoline, and electricity bills. Others will be on wants, like personal travel, buying new clothes, and going out with friends.
If you are looking for extra cash to meet your financial goals, or completely turn around your finances, cutting unnecessary variable costs is a treasure trove of opportunity.
Smart Tip:
Reducing variable costs can free up cash flow to help you reach other important personal financial goals like saving an emergency fund or starting an online investment account.
Examples of Variable Costs
Do any variable expenses come to mind? Once you know what to look for, variable costs are easy to spot (and eliminate). Here are some variable costs that may be sprinkled throughout your budget:
- Utilities
- Groceries
- Eating out
- Drinks with friends
- Transportation expenses
- Dating costs
- Clothing purchases
- Plane tickets
- Movie tickets
Variable costs often make up the fun costs in life. When adopting a budgeting strategy don't cut your variable expenses down to the studs. Even if you are trying to turn your finances around, it is essential to ensure you are rewarding yourself along the journey. Financial psychologists recommend rewarding yourself after “small wins” to encourage better long-term financial decisions.
Smart Tip:
Always get gift receipts for big-ticket purchases. If you have buyer’s remorse on a variable cost out of your budget, you can always return the item(s) and get your cash back. Asking for a gift receipt is a hedging strategy that can help you save money.
Refine Your Variable Costs and Save More
Controlling your variable costs can be the catalyst that ignites financial change. It’s important to set limits for your variable expenses and find ways to save throughout the month. Saving starts with realizing how much you are spending on variable expenses. Once you have a grasp of your spending habits, choose a budgeting strategy that helps control your costs.
There are a variety of budgeting strategies. The 50/20/30 budget is a popular budgeting method that provides spending benchmarks and categorizes spending into three cohorts: 50% on needs, 20% on saving and investing, and 30% on personal spending.
Your financial goals should dictate how much, or how little, you should spend on personal variable expenses. If you are trying to get out of debt or save for an emergency fund, then spending aggressively on going out to eat, drinks with friends, and taking vacations doesn’t make much financial sense. Instead, you want to align your goals with your spending patterns.
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You can cut your variable expenses with a stepwise approach. For example, try reducing how much you are going out to eat by $100 each month. Put that cash toward paying off debt, an emergency fund, or investing. In the next month, try to reduce your variable costs by $100 in another area (while keeping your going-out budget reduced by $100), like planning a staycation instead of traveling. You can quickly save more by snowballing your success using this approach.
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Smart Summary
Variable costs can get out of control quickly if you don’t actively monitor your spending. Credit cards and other painless payment forms have made purchasing a new shirt or concert ticket incredibly easy. This comes at the cost of having to be conscious of your spending. Pick a budgeting strategy that allows you to control your variable and fixed costs. Meeting your financial goals requires getting active attention. It’s a smart money move to focus that attention on tracking your variable expenses.
Frequently Asked Questions
Your highest fixed costs depend on your lifestyle. For some it’s going on vacations, for others it’s spending on luxury handbags. Reining in your variable costs will inject needed cash into your budget if you are trying to build savings or invest.
Budgeting can help you easily control variable costs. By tracking your spending over time, you can see what areas need improvement. Maybe you are unnecessarily spending too much on new clothes, vacations, or going out. Whatever the expense, budgeting can help you get it under control.
Yes. Fixed costs are usually long-term and are more difficult to reduce quickly than variable costs. You can think of fixed costs as rent, mortgage, gym memberships, or cell phone plans. While you can cut fixed costs, controlling your variable expenses is a low-hanging fruit.
