1. Fixed expenses
What is a fixed expense? Fixed expenses are costs that are the same (or around the same) every month or every year you have to pay them. While the amounts may vary slightly, the idea is that you're responsible for them on a regular basis.
Here are a few common examples of fixed expenses:
- Mortgage payment
- Monthly rent
- Monthly property taxes
- Homeowner's or renter's insurance
- Utility bills
- Car payments and insurance
- Life, health or disability insurance
Keep in mind that while these are fixed expenses, they should be reviewed regularly. Selling a house, taking on debt or marrying someone with a different financial situation can all affect your fixed expenses.
2. Variable expenses
What is a variable expense? Variable expenses are within your control and usually fall in the discretionary category, such as your daily latte. You can pick how much you want to spend on these items each month. Here are a few examples of variable expenses:
- Personal care items
- Dining out
- Personal grooming
Saving money is something most people want to do, but it can feel like hard work. Fortunately, a little planning and budgeting can go a long way to boost savings.
The first step is to figure out what expenses you need to save for - then put the money for those expenses into a savings account. It can help to view your expenses as falling into two categories - savings for irregular expenses and savings to go toward specific goals.
Irregular expenses are expected but the timing and actual costs can be hard to predict. You need to budget for irregular expenses so that you don't rely on a credit card to pay them. Healthcare is one major expense that you will absolutely need to budget for, given that costs continue to rise. A few other examples of irregular expenses include:
- vet bills
- special occasion or holiday gifts
- car maintenance
- house maintenance/repairs
- annual or quarterly property taxes
This type of savings includes putting aside money for your goals, such as
- car or other vehicle purchase
- home renovations or a down payment on a new house
To calculate how much you need to save each month, figure out how much you want to save, determine when you need to have it saved by, then divide by the number of months until your target date.
How to classify certain expenses
If you are struggling to determine what category a certain expense falls under, here are some thoughts to consider that can help answer the question:
- Is this expense the same and does it occur regularly? Fixed.
- Can I control how much I spend on this? Variable.
- Should I be saving for this item in advance? Savings.
Read more: How much do you need to retire?
How to set smart and realistic retirement savings goals
What are you looking forward to in retirement? If you dream of exploring the world, taking up a new hobby or simply enjoying your newfound freedom, now is the time to identify your future expenses to turn those dreams into reality.
Learn more about setting smart and realistic retirement goals.