Module 1 · Lesson 4

Variable Costs

7 min read

Variable Costs

Variable costs are expenses that change from month to month. Unlike fixed expenses, you have some control over these, but they're still essential to track and plan for.

What Counts as a Variable Cost?

Variable costs include:

  • Groceries: Food shopping (amount varies based on what you buy)
  • Utilities: Electric, gas, water (varies with usage and season)
  • Transportation: Gas, public transit, ride-sharing (varies with travel)
  • Dining Out: Restaurants, coffee shops, takeout
  • Entertainment: Movies, concerts, hobbies, activities
  • Personal Care: Haircuts, toiletries, personal items
  • Clothing: New clothes, shoes, accessories
  • Home Maintenance: Repairs, supplies, improvements
  • Medical: Co-pays, prescriptions, over-the-counter medications
  • Gifts: Birthdays, holidays, special occasions
  • Charitable Giving: Donations, tithes, contributions

Why Variable Costs Matter

Variable costs are where most people lose control of their budget because:

  1. They're flexible - You can spend more or less
  2. They're easy to underestimate - Small purchases add up
  3. They're where lifestyle choices show up - Your values and priorities

The goal isn't to eliminate variable costs, but to intentionally plan for them so they align with your priorities.

How to Estimate Variable Costs

Step 1: Review Historical Spending

Look at your last 3-6 months of transactions and categorize variable expenses:

  • Groceries: Total spent on food shopping
  • Dining Out: Restaurants, coffee, takeout
  • Entertainment: Movies, hobbies, activities
  • Utilities: Average monthly utility bills
  • Gas/Transportation: Fuel, transit passes, ride-sharing
  • Personal Care: Haircuts, toiletries
  • Other: Any other variable expenses

Step 2: Calculate Averages

For each category, calculate your average monthly spending:

Average = (Month 1 + Month 2 + Month 3) ÷ 3

Tip: If you've already imported transactions into the app, you can use the Budget Averages Report to automatically calculate your average spending across all categories. This saves time and ensures accuracy.

Step 3: Account for Seasonality

Some variable costs change with the season:

  • Utilities: Higher in summer (AC) or winter (heating)
  • Gas: More in summer (travel) or winter (holidays)
  • Gifts: Higher around holidays and birthdays
  • Entertainment: May vary with weather or events

Pro Tip: Use the highest recent month as your baseline, or average the last 6 months if you have seasonal variations.

Step 4: Set Realistic Targets

Your average spending is your starting point, but you can adjust:

  • If you're overspending: Set a target slightly below your average
  • If you're comfortable: Use your average as the target
  • If you want to save more: Set a target below your average

Common Variable Cost Categories

Use these categories to organize your variable expenses:

Essential Variable Costs

  • Groceries
  • Utilities (electric, gas, water)
  • Gas/Transportation
  • Medical co-pays and prescriptions
  • Personal care basics (toiletries)

Lifestyle Variable Costs

  • Dining out
  • Entertainment (movies, concerts, hobbies)
  • Clothing and accessories
  • Home improvements and decor
  • Personal care (haircuts, spa, etc.)

Occasional Variable Costs

  • Gifts
  • Charitable giving
  • Home repairs
  • Car maintenance
  • Travel

Practical Exercise

Before moving on, take a moment to:

  1. Review your last 3 months of bank and credit card statements
  2. Categorize all variable expenses
  3. Calculate the average monthly spending for each category
  4. Total all variable costs to get your monthly average

Tip: If you've imported transactions into the app, the Budget Averages Report can automatically calculate these averages for you. This is especially helpful if you have demo data set up - you can see how the report works with sample transactions.

Write this number down - we'll use it when building your budget!

Budgeting Strategy for Variable Costs

When you create your budget, you'll assign a target amount to each variable category. The key is:

  • Start with your averages - Use historical data as your baseline (the Budget Averages Report can help with this)
  • Adjust for priorities - Increase categories that matter to you, decrease others
  • Leave room for flexibility - Variable costs are called "variable" for a reason
  • Review and adjust - Your first budget won't be perfect; you'll refine it over time

Red Flags to Watch For

  • Variable costs > 40% of take-home pay: This may indicate overspending
  • No tracking: If you can't estimate variable costs, you're flying blind
  • All categories increasing: This suggests lifestyle inflation

Key Takeaway: Variable costs are where you have the most control. Track your historical spending, calculate averages, and set intentional targets that align with your priorities.