A fixed cost is an expense that does not change with an increase or decrease in the number of goods or services produced or sold. These are expenses that have to be paid by a company, independent of any business activity. Think rent, insurance, salaries.
Variable costs, on the other hand, may change significantly from one month to another based on the level of production or activity.
Household budgets hold the same reality. They are comprised of two types of expenses: fixed and variable. Our mortgage payment, for example, does not change from one month to another (fixed), but the exact amount of money spent on clothing or ice cream varies wildly from one month to another (variable).
In fact, the personal budgeting tool I recommend most is built on the foundation of comparing fixed expenses to income in order to discover how much is left for variable costs.
Theoretically, fixed costs are not easy to change—that is why they are called “fixed.” But not easy and not possible are not the same.
A business (and a household) can always make changes to their fixed costs. And when they lower them, they are left with more margin in the budget and more money in the bank. So let’s go over some budgeting tips to lower your fixed costs.
10 budgeting tips to lower your life’s fixed costs:
1. Buy/Rent a smaller home. In most situations, housing costs (rent, mortgage, taxes) take up the largest percentage of a person’s income. Living in a smaller home offers opportunity to cut these fixed costs. In our society, moving into a smaller home is equated with taking a step back in life, but that is a shame. There are many benefits to a family living in a smaller home. And your largest expense offers the greatest opportunity.
2. Avoid car payments. Among the most important financial advice I’ve ever received was the recommendation to never carry a car payment. “Buy the most reliable car you can purchase with cash, and then begin saving for your next vehicle. Sell your old one, add the cash you’ve saved, and upgrade.” I have followed it my entire life. And it is advice that can dramatically reduce your life’s fixed cost.
3. Double-check recurring expenses. Take a hard look at your next credit card/bank statement searching for recurring monthly expenses (memberships, subscriptions). Are you still using them all? Did you forget that some were even there? Cancel any of those you no longer need or use. Your monthly fixed cost will shrink immediately.
4. Research insurance costs. Insurance is often like elevator music—it’s running in the background but we rarely pay any attention to it. We research insurance before we buy it (property, auto, life, health). But once the decision has been made, we rarely consider other options. If it’s been five or more years since you selected your insurance company, it’s worth the time investment to double-check your premiums and compare other options.
5. Take your lunch to work. Food is a necessity, but how much we spend on food can vary greatly. Reduce the fixed cost of your food bill by choosing to pack a sandwich or salad for lunch rather than dining out.
6. Pay off your credit card debt. Interest payments are like flushing dollars down the drain—we don’t receive anything for them. I understand fully that some borrowed money pays off in the long run (mortgage, business, some student loans), but it is still important to think thoroughly about the implications of taking on a loan. Also, if you are requiring loaned money for consumeristic purchases (credit card debt), this is an interest payment that should be eliminated as quickly as possible.
7. Stop upgrading your phone. The monthly fees paid to cell phone providers have increased dramatically over time. Check other rates and options in your area. But one way to lower your fixed costs in the long run is to stop upgrading your phone just because you are eligible. Use your existing phone until it dies rather than needing the new model just because your company of choice announced a new one.
8. Cut utility bills at home. According to some studies, the average consumer spends 7% of their annual income on energy. Cutting utility bills may not seem significant, but reducing each, over the course of time, does result in substantial savings. Get a programmable thermostat, lower the temperature on your water heater, unplug unused electronics, cut cable, or better seal your home for cold or heat.
9. Research childcare options in your area. If your children are not in school (or need supervision before/after), look into new childcare options that have sprung up in your neighborhood. Just last week, my wife was chatting preschools with a friend. Our friend was shocked to hear the registration fee for a new, high quality preschool that had just opened in our area—it was much less expensive than the one she had intended to enroll her daughter in. After a few phone calls and independent research, she lowered her fixed costs significantly by enrolling in the new one.
10. Ditch the storage unit. 10% of Americans rent offsite storage. In almost every case, it is simply not necessary. I understand they can be helpful in certain situations: during moves or in incredibly high rent areas. But if your storage unit is simply storing stuff because you own too much stuff, get rid of it. Stop paying money to keep stuff you don’t need. Free your life of the financial and mental burden today.
Lowering our life’s fixed costs offers great opportunities. We can get ahead financially, we can pay off debt, or we can live more generous lives. Either way, it’s always worth the effort to practice some of the above budgeting tips.