The three types of costs related to liabilities.
In assessing one's liabilities, there are different types of costs to consider. The kind of cost will determine the approach you take toward managing that cost. The three types of liability costs are: fixed, variable, and mixed, and we will discuss each in detail.
Fixed costs, as the name suggests, are set and typically do not change over a short time. For example, monthly rent, mortgage payments, lease payments, interest rates, and insurance premiums. Despite whatever is happening in the economy or your personal life, these costs remain constant. Fixed costs do not fluctuate over time, costs that fluctuate in the short-term are considered variable.
Variable costs, again as the name suggests, fluctuate and typically are more difficult to gauge. For example, grocery bills (unless you consistently buy the same things, highly unlikely!), clothes, gas, and vehicle maintenance. We complain when we try to fill our gas tank because every week it feels like we paying more, for the same amount of gas. The quality of the gas does not change. However, the price is dependent on crude oil supplies, refinery operations, and gasoline pipeline deliveries. These factors are tough to predict and control; hence, the variable nature of gas prices. Unlike gas prices, some costs have both a base rate and a rate per usage, these costs are considered mixed.
Mixed costs have both a fixed and a variable component. Your household bills (gas, electricity, and water) are typically mixed costs. Mixed costs usually consist of a fixed component for merely having the service and a variable component for additional fees based on your monthly use of the already existing service. For example, in New York, Con Edison (the electric company) charges a basic service charge and billing charge for fixed maintenance operating costs, i.e., having a technician read your meter regularly and calculating your bill and sending it to you. Additionally, you are required to pay $$/kWh proportional to the amount of electricity you consume per month. They apportion your fixed and variable cost and present the grand total on your electricity bill for the month which you are required to pay.
Now that we have assessed the three types of costs, how can we approach each? Are there best practices to consider in your approach depending on the type of cost? Let's see.
What costs can you minimize?
I would strongly suggest that wherever possible, you minimize your variable and mixed costs. Think like a minimalist when you are spending. Before you make any purchase, give yourself a week to contemplate the purchase. If at the end of the week you still think you 'need' the item then by golly you can have it but trust your instincts. If you forget about the thing after a few days and don't see the need for it, then you probably should not buy it just yet. The same minimalist living will save you money on your utilities. Turn the lights off when you leave a room, do not leave electronics plugged in for extended periods, turn off the water while you lather up your body... and the list goes on. There are simple steps that one can follow to minimize mixed and variable costs.
What costs can you eliminate?
I suggest trying to eliminate some variable costs that are bleeding your resources. Don't pay a subscription fee for a magazine you don't read. Don't get charged for a gym membership when you don't currently have the time to go, instead, create a simple at-home workout regiment for yourself and follow it. Remove the add-on packages that you don't use whether it be on your cable package or cell phone. Occasionally call your cell phone, Internet, cable, and insurance company and inquire about promotions that can possibly reduce your monthly bill. Eliminating unnecessary costs requires active participation. The keyword here is active, it is just not possible for you to eliminate your unnecessary costs without intentionality.
What costs can you plan for?
You can certainly plan for your fixed costs because those are stable, so you know beforehand what they will be for at least the next year. You can also plan for your mixed and variable costs, but these require much patience and flexibility with your budget depending on the weather and personal life changes. Gas is higher in the winter months and electricity is higher in the summer months so you can budget accordingly. Also, if you are entertaining guests or going on a vacation, you would need to allocate additional funds leading up to these events. I think that planning for the things you can control makes the uncontrollable much easier to manage.
Start assessing your liabilities today. Take control of your financial future, one small decision at a time.