This is real Matrix-style stuff right here
For a business owner, understanding fixed costs and variable costs is essential. It’s also pretty important for people looking to dominate their spending.
A fixed cost is one that you can’t change month to month. For a business, that is things like rent or salaries for full-time staff.
A variable cost is one you can change easily. Something like internet advertising, taking clients out to dinner, or scheduling part-time staff to do more or fewer hours.
The more fixed costs a business has as a proportion of revenue, the less flexibility it has on how it spends its revenue. In extreme cases high fixed costs combined with falling revenue can bankrupt the company.
That is one reason Japanese companies have embraced the shift to temporary workers. It changes a fixed cost (regular staff) into a variable one.
I believe the same thing is true for individuals.
Think about your expenses. How many of them are fixed? What proportion of your monthly income is spoken for at the beginning of the month?
Rent or mortgage is a fixed cost.
So is debt repayment.
Utility bills and food are semi-fixed. You have to pay them, but might be able to reduce them if necessary.
Transportation, discretionary shopping, hobbies, eating out, and entertainment are variable costs. If you really had to you could cut them completely.
A very common problem is when someone assumes that all their costs are fixed. That mindset leads them to miss opportunities to reduce spending or spend in different ways.
Thinking about fixed and variable costs also allows you to spot opportunities: reducing a fixed cost gives you an ongoing benefit every month, as opposed to reducing a variable cost once.
It can be much better to move to a cheaper place and reduce your rent/mortgage (money that you will save every month) than to stop going out and seeing friends (a temporary measure).
Shopping around for cheaper insurance is a winner, as is changing your smartphone contract to a new provider.
How about you? What percentage of your spending is fixed? Do you have any unrealized ‘big wins’ waiting for you to get around to looking at them?
[quote]What percentage of your spending is fixed?[/quote]
Frankly, I’m not sure, tho I’m trying to work on our budget for the last few months, so maybe I’ll try to think about that. We’ve never looked at it this way–fixed vs variable–so maybe we’ll give it a look, if I can sell the wife on it.
Utilities (fixed) have declined a little since the kids left, but not really much (less water use, water heating, less clothes drying, but overall we probably heat and cool about the same as when they were here–so zero sum there.
We hardly ever eat out, maybe a lunch or two a month, or a splurge when the kids come home. I think my wife has a dominant eat-at-home gene, and it’s true, you can eat better and cheaper _and healthier_ fixing your own food at home.
We do see a movie now and then, usually a local art/indie place. Maybe every couple months.
Since I retired I’ve been trying to get rid of extra clothes, and not buy more…! I did put on long pants and long sleeves when I was doing some reform work outside our genkan in august, but that was to keep the crud off (was doing a lot of sanding, and then painting) and to soak up the sweat. Since about golden week, I’ve otherwise been in shorts and t-shirts.
One hobby is cycling, and I’ve and the bikes for years. It’s completely free to hop on a bike, as I did this morning, and yesterday, and ride 36km. Over a year there’ll be some maintenance costs, but not a whole lot.
Another hobby–playing guitar. Those are, again, long since paid for, so hey, maybe a set of strings now and then.
There’s no place cheaper than where we live now (owned, free and clear). Yeah, it’s old, but it’s also almost perfect, size- and layout-wise. (Kids gone, so just the two of us, about 130-140m3.) Sure, we could spend 25-40 million or more rebuilding for some cush-looking and cush-feeling new place, but in terms of utility bills, 25 million will go a long, long ways towards making a few utility bills cheaper.
This reminds me of a Reddit post I saw a couple weeks ago on /r/personalfinance. Lots of people go there for advice on how to lower their dept, pay for school, investing etc. This guy posts that he and his wife make over 100,000$ (USD) a year and they are sinking in dept. He has no idea why and can /r/personalfinance help. So they get him to list all the stuff he spends his money on. A dog…. which is NOW a fixed cost. The most expensive phone possible with 3 phone lines (come on guys! Low cost carriers). The most expensive apt and car he could afford, which obviously he couldn’t. On top of food, and internet, he just listed $2000 a month on “miscellaneous spending”. He couldn’t even be specific if he was just using it on strippers or burning it for fun. The poor fella just couldn’t understand that everything in his life was in excess (i.e., variable costs) or that he was paying WAY too much for his fixed costs like rent.
Eeek. Miscellaneous spending should be pennies, all other expenses need a home 🙂
For my monthly survival budget (that is if my wife and I were both to lose our incomes and be transitioning to another job for a X number of months), fixed and semi-fixed budget areas represent slightly more than 50%.
But talking about smaller places, we left a smaller place for a bigger one farther away from the train station to accommodate my wife’s “lust” and I don’t regret it even if the rent is sensibly higher. Don’t get me wrong, I love to spend time with my friends, but… there’s usually only one wife and one home we go back to (at a time at least).
And regarding the misc. category, I Allow more than pennies ‘cause you can accumulate the unused sums for surprises without impacting your saving plans: unexpected tax payment or… moving to a new place in Tokyo and assuming the costs of replacement for Tatamis and Fusumas!! Ouch!