This is real Matrix-style stuff right here
For a business owner, understanding fixed costs and variable costs is essential. It's also pretty important for people looking to dominate their spending.
A fixed cost is one that you can't change month to month. For a business, that is things like rent or salaries for full-time staff.
A variable cost is one you can change easily. Something like internet advertising, taking clients out to dinner, or scheduling part-time staff to do more or fewer hours.
The more fixed costs a business has as a proportion of revenue, the less flexibility it has on how it spends its revenue. In extreme cases high fixed costs combined with falling revenue can bankrupt the company.
That is one reason Japanese companies have embraced the shift to temporary workers. It changes a fixed cost (regular staff) into a variable one.
I believe the same thing is true for individuals.
Think about your expenses. How many of them are fixed? What proportion of your monthly income is spoken for at the beginning of the month?
Rent or mortgage is a fixed cost.
So is debt repayment.
Utility bills and food are semi-fixed. You have to pay them, but might be able to reduce them if necessary.
Transportation, discretionary shopping, hobbies, eating out, and entertainment are variable costs. If you really had to you could cut them completely.
A very common problem is when someone assumes that all their costs are fixed. That mindset leads them to miss opportunities to reduce spending or spend in different ways.
Thinking about fixed and variable costs also allows you to spot opportunities: reducing a fixed cost gives you an ongoing benefit every month, as opposed to reducing a variable cost once.
It can be much better to move to a cheaper place and reduce your rent/mortgage (money that you will save every month) than to stop going out and seeing friends (a temporary measure).
Shopping around for cheaper insurance is a winner, as is changing your smartphone contract to a new provider.
How about you? What percentage of your spending is fixed? Do you have any unrealized 'big wins' waiting for you to get around to looking at them?