A normal budget breaks down expenses into three categories: Fixed, Variable, and Periodic.
What are Fixed Expenses?
Fixed expenses are the easiest ones to grasp and usually the easiest to plan for. They happen regularly and are the same cost every time. Your mortgage payment is a fixed expense. Your car payment, insurance payment, and any other set, regular payment are all fixed expenses. They’re easy to plan for because you know what they’ll cost and how often you’ll need to pay them.
What are Variable Expenses?
Variable expenses are the biggest category. These include food, utilities, entertainment, and transportation costs. A variable expense occurs semi-regularly and the cost can changes depending on a number of factors. For example, you don’t pay the same amount every time you shop for groceries, so the cost is variable.
You can plan for variable expenses by examining your spending over a period of time and creating an average for each category. This means that each individual payment might nothit the budget exactly the way you planned, but over time and multiple payments you’ll (hopefully) arrive at your estimate.
What are Periodic Expenses?
Periodic expenses, by comparison, are the trickiest expenses to plan for because while they occur regularly, they’re usually rare (maybe once a year) and can vary widely. Gift giving falls into this category, along with maintenance and repair costs for your home and automobile.
How to Budget for Periodic Expenses
The problem with periodic expensesis that when we’re drawing up a budget we tend to forget to consider these costs. You don’t forget to account for your rent or your electric bill because you have to pay those every month. But if you’re planning in January you might forget that by the end of the summer you’ll need money to buy your kids back to school clothes and supplies.
It’s easy to forget about property taxes, car registrations, and the fact that your tires probably need to be replaced this year. So even though you’ve paid for these things before (many times) they can still sneak up on you and ruin an otherwise solid budget.
The simplest way to plan for a year’s worth of periodic expenses is to do a thorough inventory of all the periodic expenses you incurred last year. Any expense that isn’t fixed and isn’t accounted for in your variable category is periodic and goes in the pile.
Once everything is gathered, total up the cost of every expense and divide by 12. Now take that number and add it to your budget. This is the amount you need to save every month in order to cover your periodic expenses.
It’s an estimate, of course, so some years your periodic expenses might outpace your designated savings, and some years you might have money left over. Even if it’s not exact, at least you’ll never be caught unprepared by a periodic expense again.
If you need help sorting your expenses, financial counselingfrom MMI is free, confidential, and available 24/7. Let our experts help you make the most of your money.
Tagged in Advice for families
Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.
FAQs
Here are some examples of periodic monthly expenses you may have: Tuition and fees. Books for classes. Back-to-school supplies for yourself and/or children.
What is the 50/30/20 rule? ›
The rule is to split your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings. 1. This intuitive and straightforward rule can help you draw up a reasonable budget that you can stick to over time in order to meet your financial goals.
What are 5 examples of variable expenses? ›
Common variable expenses include:
- Groceries and dining out.
- Clothing.
- Personal care.
- Entertainment.
- Gasoline.
- Home and car repairs.
- Medical bills.
Fixed Expenses
These are the expenses you have that don't change month-to-month. Your mortgage or rent, car payment, and insurance are examples of fixed expenses. They may vary slightly from year-to-year (say, a rent increase) but overall you can count on them to stay the same for at least a year at a time.
What is one example of a period expense? ›
Other examples of period costs include marketing expenses, rent (not directly tied to a production facility), office depreciation, and indirect labor. Also, interest expense on a company's debt would be classified as a period cost.
Are groceries a periodic expense? ›
Variable expenses are the biggest category. These include food, utilities, entertainment, and transportation costs. A variable expense occurs semi-regularly and the cost can changes depending on a number of factors. For example, you don't pay the same amount every time you shop for groceries, so the cost is variable.
How to budget $4000 a month? ›
How To Budget Using the 50/30/20 Rule
- 50% for mandatory expenses = $2,000 (0.50 X 4,000 = $2,000)
- 30% for wants and discretionary spending = $1,200 (0.30 X 4,000 = $1,200)
- 20% for savings and debt repayment = $800 (0.20 X 4,000 = $800)
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
What is the 40 40 20 budget rule? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Is a cell phone bill a fixed expense? ›
Loan payments: Payments for auto loans, student loans and other types of installment loans are the same every month. Cell phone and internet bills: These are usually fixed bills that are based on what service level you choose, rather than how much of the service you use within a month.
Typical fixed expenses include car payments, mortgage or rent payments, insurance premiums and real estate taxes. Typically, these expenses can't be easily changed. On the plus side, they're easy to budget for because they generally stay the same and are paid on a regular basis.
What are irregular expenses? ›
An irregular expense may not happen on a regular basis like your rent or mortgage payment, but it is more predictable than an unexpected expense. Examples of irregular expenses include property taxes (if not paid monthly), insurance premiums and replacing your laptop.
What expense type are groceries? ›
Variable expenses examples
Examples of variable expenses that you may be paying include: Gas. Groceries.
What is considered a periodic expense? ›
Periodic expenses are irregular yet predictable expenses. Unlike fixed expenses, they don't occur on a monthly basis. For example, tuition payments would be a periodic expense. Tuition can be paid quarterly, but isn't paid on a consistent, monthly basis.
Is food a fixed or variable expense? ›
Examples of fixed expenses are mortgage payments, car payments, student loan payments, and subscription fees. Examples of variable expenses are utilities, food, dining out, entertainment, and travel.
What is an example of a periodic bill? ›
Periodic expenses are irregular yet predictable expenses. Unlike fixed expenses, they don't occur on a monthly basis. For example, tuition payments would be a periodic expense. Tuition can be paid quarterly, but isn't paid on a consistent, monthly basis.
What is an example of periodic method in accounting? ›
Example of Periodic Systems. Periodic system examples include accounting for beginning inventory and all purchases made during the period as credits. Companies do not record their unique sales during the period to debit but rather perform a physical count at the end and from this reconcile their accounts.
What are periodic income examples? ›
Examples include: compensation for services, income from business, gains from property dealings, interest, rents, dividends, pensions, IRA distributions, social security, distributive share of partnership gross income, and alimony, but not child support.
What is an example of a periodic accounting activity? ›
These activities occur at regular intervals such as once every week, or once every month, etc. Financial reports, income tax returns and payroll cheques are an example of a periodic accounting activity.
