by Stacy Francis, CFP®, CDFA
Perusing the annual report of a company a client wants to buy, I got to thinking about how these two words are so much more than just accounting jargon. They affect your financial future to a much higher extent than you may think. Let’s break them down and take a look at what they are – and aren’t.
Fixed expenses are all reoccurring expenses – from rent or mortgage payments to car payments and tuition expenses for your children. Fixed expenses occur repeatedly, and typically can’t be dropped with a moment’s notice, should your financial situation change.
Classic examples of variable expenses are shopping sprees, vacation trips, and furniture (as long as you pay cash). Of course, many items fall in the grey zone, and could be considered either variable or fixed, depending on your perspective. This category holds such items as Internet and cable bills, and gym memberships. They happen every month, but it wouldn’t take you ages to drop them if you really needed to.
Now, here’s the tricky part. Anything you finance, whether a new couch or TV or treadmill, becomes a fixed expense – and this is very dangerous. Because if financial independence is your goal, all fixed expenses are your enemies. They all up your cost of living, thus not only adding to the amount of money you need to set aside in order to live off your investments, but they take away the money you could otherwise have put toward that capital – over and over again.
Now, we all like nice things, and everybody deserves to splurge from time to time. But when you do – make sure you pay cash or with a debit card (if you have to use credit, always pay the bill off in full as soon as it arrives). Keeping your expenses down is one of the key factors in the quest for financial independence.
Now, everywhere you go, salespeople will tell you how mad it would be not to take advantage of their financing plans. Few societies have as high fixed expenses per capita as the United States, and as a result, few people have to work as hard to pay for these expenses as the Americans. My guess is that if you’re reading this, you very much wish to be different.