From the previous step you should now have your base expense categories identified. In the next few steps we are going to dissect these expenses and classify them into three different types, starting here in step 9 with having a closer look at your fixed expenses. Typically a fixed expense:
- is a set amount that you have little to no control over
- has a regular time interval (e.g. monthly or yearly for example)
- is needed for day-to-day living
- you cannot cut down without making a big life change or running substantial financial risk
(I classify insurance as a fixed expense, hence the addition of “without running a substantial financial risk”.) With fixed expenses you can tell at the start of each month they will be coming up and how much you will be charged no matter what you do. You know that every month you’ll be charged rent, or that you have to pay your mortgage.
Where things are getting more difficult is deciding exactly what classifies as “necessary for day-to-day living” and what doesn’t. When going through your expenses make sure that you check each expense against the four identifying features of a fixed expense mentioned above. In order to get you started, let’s look at two examples:
Rent or mortgage
When we check rent or mortgage payments against the four characteristics of a fixed expense it becomes clear that this is indeed a fixed expense:
- A set amount that you have no control over – YES – you will be charged the same amount every single month regardless of how much you’ve been at home that month.
- It has a regular time interval – YES – monthly (usually)
- It is needed for day-to-day living – YES – you need shelter and a place to live to survive
- You cannot cut down the expense without making a big life change – YES – you might be able to reduce the expense by moving to a different house or flat, but that is indeed a big life change as it has a substantial impact on your daily life.
Although renegotiating your mortgage conditions might be an option to take costs down, it is unlikely you will renegotiate at regular intervals meaning your mortgage is indeed a fixed expense: as soon as the new conditions apply, the expense is fixed again.
You might feel that you can’t live without cable and therefore classify your cable subscription as a fixed expense. Let’s check this against our four points:
- A set amount that you have no control over – UNSURE – this might be the case unless you have the option of selecting cheaper or more expensive packages
- It has a regular time interval – YES – usually monthly or yearly
- It is needed for day-to-day living – NO – you don’t need cable to survive, sorry!
- You cannot cut down the expense without making a big life change or run a substantial financial risk – NO – cutting out cable is not a big life change. Contracting a service via a cheaper alternative or online company such as Netflix is not a mayor life change. There is no financial risk involved in cancelling your cable.
In summary, cable TV is NOT a fixed expense as you can easily influence this payment without any big changes. (That is not to say you have to give up cable TV! This is just an example of how to check whether something is a fixed expenses. I am not saying you should give up the pleasures in life, so if cable TV is one for you, by all means keep enjoying it!).
Step 9 – Identify your Fixed Expenses – in detail:
- Make a list of all your fixed expenses that you can think of and by looking at your expenses register. There might be some that you haven’t yet registered, as they might be yearly bills so don’t forget to look through your administration for payment statements or policies for bills that you pay infrequently, such as once a year for example.
- Below is a list of possible expenses to include, depending on your personal situation:
- mortgage or rent
- housing etc.
- property tax
- car taxes etc.
- Mark all of the identified fixed expenses in one particular colour, with a particular letter or move them all together, so you can easily distinguish your fixed expenses from other expenses.
- Once you have got your fixed expenses identified, you will need to spend some time investigating how much you spend on average on each category especially if an expense hasn’t come up yet, which might be the case with yearly bills.
- Next to each category indicate the monthly cost you have for each. If it is a yearly bill, make sure to divide the total yearly amount by 12 to get the monthly cost, if it is a bi-yearly bill, divide the number by 6 etc.
That’s that for now, in the next few steps we will look at three more expense categories: variable, discretionary and savings expenses to complete our list, before we start looking at how to make sure our expenses meet our goals.