In Part One of this series, we discussed why it is financially prudent not to upgrade your lifestyle so quickly after you have started working. If you have yet to read the first part, we would recommend for you to read it.
In today’s article, we will talk about another area of spending. Fixed expenses. More specifically, we will be referring to major fixed expenses that young adults may incur when they start working.
What Are Fixed Expenses?
When you spend money each month, your spending can be classified into two main categories. Fixed and variable expenses.
Variable expenses are items such as money spent on food, drinks, shopping and entertainment. When it comes to variable expenses, individuals can always choose to make the effort to reduce their expenses at any time they want to.
Fixed expenses work differently. Fixed expenses are items that will incur the approximately the same amount of cost each month, regardless of how much you consume them. Once added to your monthly expenditure, they cannot be easily adjusted or removed without the individual incurring some form of penalty.
Because of that, young adults need to be a lot more cautious when dealing with fixed expenses in life. Adding a fixed expense that you may struggle to afford could potential harm your finances in the long run.
Examples Of Fixed Expenses
Here are two similar group of items that can be classified under two separate form of expenses – Fixed and variable. For example, when you visit the gym regularly on a pay per entry basis, your expense is variable. When you commit to a 2-year membership, it becomes a fixed expense.
|Variable Expenses||Fixed Expenses|
|Transport||Taxi Rides||Buying A Car|
|Investments||Buying An Investment Linked Policy (ILP)||Regular Investment To Purchase Stocks|
|Leisure||Per Entry Gym Visit||Monthly Gym Membership|
Within the category of transport, a young graduate who just started work may find himself in a position where he can afford to spend more on more private transport. He could choose to take more cab rides and may even spend up to $800 per month on it. This may sound excessive, and it probably is. Yet it is still an expense that he can choose to reduce anytime he wants.
On the other hand, buying a car and having a monthly expenditure of $800 for it (probably more) represents a fixed monthly expense to a person’s expenditure. This is an expense that a person cannot choose not to pay. The only way to get out of this obligation is to sell off the car and risk incurring significant losses.
Even Financial Instruments Can Work Against You
It is natural to expect that financial instruments should be good for your financial health. However, that is not always the case.
Upon getting your first job, you are likely to be bombarded with financial advisors soliciting for meet ups with you. These advisors will want to educate you about the importance of insurance, saving and investing. Of course, they will also attempt to sell their products to you since their livelihood depends on it.
It is important to practise prudence when buying financial products. When it comes to areas like insurance, make sure that the premiums you are paying are not excessive. Even if they appear affordable, you need to remember that you have other financial goals as well, such as building up an emergency fund, and to start investing early. Don’t simply let your monthly cash flow be used up to buy some life insurance policy that does not give you a good return. Always remember that spending a lot of money on insurance should not be confused as being financially responsible.
Read Also: Why You Should Not Overspend On Insurance
Committing in investment and saving plans becomes a part of fixed expenses as well. Unlike making your own direct investments periodically, such plans will not provide you with much flexibility should you cease to pay the premium at any month.
In some instance, lapsing your premiums could incur a penalty so high that you could lose the bulk of the premiums you paid, even if your investments did well. As such, we usually encourage individuals to spend some time understanding investing concepts and to make investments directly themselves. It’s cheaper and provides you with much more flexibility in the long run.
To conclude, we advise young adults to be cautious whenever they are looking to add fixed expenses in their expenditure. It would be wise to weigh whether removing that fixed expense in the future would incur a large cost before committing.