Eating out in expensive restaurants, hefty bar tabs and a weakness for expensive stuff could make it tough for you to save for the future. Odds are against this when compared to fixed expenses. They are the real danger.
Fixed expenses refer to any kind of expenses you can’t immediately adjust if your economic situation changes. This could include house rent, mortgage or loan repayment obligations, school fees and insurance premiums, just to mention a few.
Antonio earns KES 30,000. He pays KES 10,000 rent for his bedsitter apartment; has a SACCO loan to repay meaning each month KES 7,000 is spent on servicing the loan. He has several other financial obligations such as utility bills, transport costs and food which he has to be factored in his monthly budget. Factoring all these expenses, Antonio hardly has anything left to save.
Picture this, if he loses his job and has no alternative source of income he won’t be able to pay his rent, service the loan or cater for his utility, transport and food expenses, meaning he is in financial ruin.
Most of has have the illusion that fixed costs are unavoidable, after all they are fixed. The reality is fixed costs can be changed. Some changes may require a long lead time; others may entail some expenses, while others can be changed cheaply. At the end, some level of sacrifice is required.
Back to Antonio
Based on the fact that a large portion of his income is spent on servicing a loan, he could opt for a cheaper house. He could also consider cutting down on his utility, transport and food expenses. Cutting down on cost will leave him with a certain amount of money which he could save or add on to servicing the loan, meaning he will repay the loan faster.
Philip Brewer, Senior Writer for wisebread.com has identified a couple of dos and don’ts that could help you manage your fixed expenses:
- You need to know what your fixed expenses are. If your budget has some fixed and variable expenses lumped together into the same category, you’ll need to separate them.
- You need to know how long they are fixed. You need to need to know how long it will take to repay the loan.
- Come up with a plan on how you will reduce your fixed expenses. You can consider moving to a cheaper place, selling your car, if you can’t always maintain it, or find was to speed up repaying your debts.
- Come up with a contingency plan. What will you do if you lose your job? Are there alternative ways of making money?
At the end of the day your fixed expenses do have a significant impact on your financial security, manage your fixed expenses.