Keeping your fixed expenses low is the quickest and most sustainable way to live within your means, save for big-ticket items such as retirement and college tuitions, and prepare for financial emergencies. What are fixed expenses?
Fixed expenses are expenses that are recurring and difficult to change. If you lose your job, for example, you may be able to drastically cut your food costs by eliminating trips to the restaurant. But you probably can't easily decrease your mortgage payment. If something happens to your income (a layoff, hours cut, etc.) or your financial situation (car need to be replaced, for example), high fixed expenses make it very difficult to cut back.
Common examples of fixed expenses
1. Mortgage/rent: Sure, you can refinance or change apartments, but that's not something you can do on a whim. You need to get bank approval to get refinancing, and you may be locked into a lease that you can't break without financial penalties. Bottom-line: if your housing costs are too high, there is no way to decrease your spending for a few lean months. For better or for worse, your mortgage or rent payment is a long-term expense.
2. Cell phone plan: If you have a pay-as-you-go phone, then your cell phone expense is discretionary and more easily changed. Most families, however, are locked into 1 or 2-year cell phone plans. With smartphones that charge $100+ a month for phone and data plans, cell phone is a fixed (and not insignifcant) expense for many American families.
3. Car payment/car lease: Transportation is another key area of fixed expense for most families. Unless you live in New York, D.C., or perhaps San Francisco, cars are a fact of life. A car loan usually runs 3 to 5 years - for that length of time you are responsible for that amount. If you lease, your payments may be lower, but at the end of the lease you will need money to roll over into a new lease or a down payment to a new car.
4. Credit card debt minimums: If you want to keep your credit report clean, you have to pay at least the minimum for your credit card bills on time every month (although if you only pay the minimum, it will cost you many extra years and dollars to pay off your entire balance).
5. Student loans: It's almost impossible to default on your student loans - they don't go away, not even in case of personal bankruptcy. The loans you've taken out for your education will be with you for the long haul. If you are in a financial crunch, you can ask for deferrment (but the interest continues to accrue on your balance) until your situation improves. Forebearance (discharge of loans), however, usually only happens in case of death or major disability.
Fixed expenses are by definition difficult to decrease if you go through a period of financial difficulty. By keeping your fixed expenses low, you will have much more flexbility to thrive in the other areas of your life.
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