Feb 23 in Personal Finance
Top 2 metrics to track: fixed vs. variable expenses
These are the most USEFUL personal finance metrics that are never talked about.
The concept is simple: Fixed vs. Variable Expenses
Your ‘fixed expenses’ are those costs that remain relatively constant each month. They're predictable and don't change much over time. These are the bills and expenses you can expect to pay the same amount for each month.
Examples:
- Rent / mortgage
- Car payment
- Utilities
- Insurance
- Subscriptions
- Other loan repayments
Your ‘variable expenses’ are the costs that fluctuate from month to month. These expenses depend on your usage or consumption and can vary widely, making them a bit more unpredictable.
Examples:
- Travel / vacations
- Eating out
- Entertainment
- Gas
- Shopping
- Donations
By understanding your fixed and variable expenses you can better manage your money and plan your spending.
Let’s say you want to figure out how much cash you’ll be left over with at the end of the month for your variable expenses.
Here’s how you could quickly figure that out:
(Current bank balance) + (Expected income that month) - (Fixed expenses) = (What’s left over)
What's left over will be your budget for your variable expenses. It's recommended to add a buffer for savings/investments that automatically gets added to your fixed expenses as well.
Figuring out what you’ll have left over at the end of the month before the month begins is a HUGE tactical advantage because most overspending problems are caused by not understanding what you truly have to spend.
The root cause of overspending often comes from poor cash flow management. Most people when they run low on money, will slow their spending.
The illusion of having a surplus of money and not realizing the debts & bills you’ve already committed to paying causes overspending in the variable expense categories that could be prevented.
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Top 2 metrics to track: fixed vs. variable expenses
