Understanding Fixed and Variable Costs

The sooner you start your financial journey the sooner you will build your financial freedom. You don’t need to join business school in order to be financially savvy and anyone can and must learn about money. The first step, however, is to understand how you manage the money that you already have. If you don’t understand your spending decisions you will never become financially literate. Thankfully, you too can change your habits if you want to, start your journey by grabbing pen and paper or open an excel file.

1 ) Make a list of all your daily expenses for one month.

A simple excel file, notes app or a notebook is all you need. When you note your expenses you can identify where and when you spend most. The “when” gets often forgotten in measuring expenses. Still, it is important to know whether you spend most during the weekdays or weekends. You can repeat this exercise for each season and track whether there are particular months i.e. summer where you spend more than usual.

2) Think of your expenses in two columns.

Once you have tracked one month’s worth of expenses you will end up with a very long list, divide this list into two columns: fixed costs and variable costs.

Here is a simple example of such a table:

Fixed CostsVariable CostsAmount

Fixed costs = Expenses you always incur.
These are expenses that only fluctuate slightly and you usually have a legal contract with i.e. rent, phone & internet contracts, gym memberships, etc.. 

Variable costs = Expenses that you don’t have on a regular basis.
The frequency and amount you spend may vary (grocery expenses, clothes, gas, etc.) depending on your spending habits. These are costs that you can adjust and have control of. You can opt for private labels (=generic store brands), buy fewer clothes, or adjust your gas mileage.

Of course, when the above terms are mentioned in economics and corporate law, they have a broader and further meaning. In simple terms though, companies divide their expenses based on identifying where the income and expense streams come from and to what extent these expenses are influenced by external or internal factors.

3) Now summarize your expense table and analyze the sum of both fixed and variable costs.

Re-think and review whether you can move costs that you believe to be fixed to the column variable costs: Do you really need your streaming and gym subscriptions? Will a day/week pass to the gym be enough? Looking now at the column variable costs, are there any costs that you can buy less of i.e. home supplies, fast fashion clothes, books, gadgets, etc.. Regardless of the sum of your expenses, certainly, there will be items from your expense list that you could buy from somewhere else, buy less, cheaper, or even stop buying. Perhaps you can shop for groceries at a different store, eat more often at home, or reduce the expenses for clothes.

For the expenses in your fixed column do online research, ask family and friends. Are there for example cheaper internet providers that provide the same service? Almost every year telecommunication providers have new price packages and contracts. To prevent decision fatigue you can visit websites offering comparison generators. In Austria, this could be durchblicker or geizhals.

5) Continue tracking your expenses and make quarterly adjustments.

Now that you have an idea of how much you spend and where you would like to change your expenses, continue tracking your expenses. Free finance management apps like MonefyWalletMoney Manager are great tools. Also, more banks provide now payment trackers within their banking app by automatically dividing your card transactions into simple categories i.e. food, housing, transportation, savings. You may be surprised that you spend on a certain category more than you expected.

Regardless of what you do with the money saved, always view your purchase from a long term perspective: Is it both a present and future need? What would you get in return? What are your future financial plans? Not only does asking these questions result in better investment decisions but you will also be living more sustainably.

The content in this article is provided for information purposes only and is not a substitute for professional advice and consultation, including financial advice and consultation; it is provided with the understanding that Millennial Warrior is not engaged in the provision or rendering of financial advice or services. You understand and agree that Millennial Warrior shall not be liable for any claim, loss, or damage arising out of the use of, or reliance upon any content or information in the article.