The Right Way to Accurately Track Your Living Expenses With a Budget

Gopesh Sharma Gopesh Sharma Follow Jan 13, 2023 · 8 mins read
The Right Way to Accurately Track Your Living Expenses With a Budget
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In our previous posts, we have read about how to create a budget, how to manage it and what should be included in your budget. We all know that Living Expenses are necessary for a human being but you should also track it in your budget so that you are prepared to tackle them in the future. This will ensure you are good with your financial journey as well as you will not run into a financial problem in the future.

Living Expense Budget

A living expense budget is nothing but a financial plan which gives details about an individual’s or family’s daily expenses tracked over a specified time period mostly monthly. Mainly the living expense budget will help people to track the spending of their necessary expenses and ensure that they save for the future too. This budget actually includes living expenses like rent or mortgage payments, insurance premiums, and utility bills, as well as variable expenses such as groceries, transportation, and entertainment. It’s important to distinguish between necessary and discretionary expenses, so you can see what you can cut back on if your budget is tight.

Having a living expense budget will ensure that you know what is your necessary expenses or simply your cost of living. It actually differs from person to person so that’s why it’s very important to track it to get your optimal number. If you are creating a living expense budget, do consider all your income and necessary expenses. This includes how much you earn each month, as well as how much you spend on bills, groceries, transportation, entertainment, and other regular expenses.

When you have this information, you will create the budget and thus will get a number positive or negative. If it is positive that means you are making more than your living expense and thus can save for your future goals whereas if the number is negative that means you have to reduce your living expense or you have to increase your income. It is not a one-time exercise and thus it should be reviewed regularly to make sure you are on top of your finances.

What to be Considered in a Living Expense?

Living expenses are the day-to-day costs of maintaining a basic standard of living or simply the cost of living. Some of the living expenses are:

  • Housing: This includes rent or mortgage payments, property taxes, insurance, and any associated utility costs, such as electricity, gas, water, and internet.
  • Food: It includes the groceries and food items you usually use every month.
  • Transportation: This includes the cost of owning and maintaining a car, public transportation, fuel, parking, and any other associated costs.
  • Healthcare: This includes the cost of medical insurance, deductibles, copays, and any out-of-pocket medical expenses.
  • Personal Care: This includes the cost of clothing, toiletries, personal grooming, and any other associated expenses.
  • Debts: This includes credit card balances, personal loans, car loans, student loans and any other associated expenses.

Do remember that every individual will have different living expenses based on their location, lifestyle and other factors, so the specific costs of living can vary greatly from person to person.

What Is Not to be Considered in a Living Expense

Not all monthly expense is considered living expense and there is some non-essential or discretionary expense which can be cut back when necessary. Some of the non-living expenses are:

  • Luxuries: This includes items or services that provide a high level of comfort or convenience and are not necessary for living. Examples include expensive vacations, fancy cars, designer clothing, or country club memberships.
  • Investment or savings: this includes any amount allocated to investment, savings or retirement plans, not directly linked to the maintenance of a basic standard of living.
  • Business Expenses: Any expenses related to business or professional activities that are not necessary for a basic standard of living.
  • Gifts: Any expenses incurred as a gift for someone else, it does not count as a living expense.

These are just examples, and mostly it depends on whether the individual whether will consider any expense as a living expense or not. The main point out here is that the individual should differentiate between the two and thus try to get an optimal budget for only living expenses.

How Much to Spend on Living Expenses?

The percentage of your income that you should spend on living expenses can vary depending on your individual and family’s circumstances. Though there are some guidelines that can be helpful in determining how much to spend on living expenses.

One common rule of thumb is the 50/30/20 rule, which suggests that you should allocate 50% of your income to living expenses, 30% to discretionary expenses (such as entertainment and dining out), and 20% to savings and debt repayment. This rule is a starting point, and you should adjust the percentages based on your individual needs and goals.

Another guideline is the “Housing cost rule”, which suggests that no more than 30% of your gross income should go towards housing costs, this includes Mortgage or rent payments, taxes, insurance, etc. However, this number might not be realistic for certain places with the high cost of living and housing prices.

But the above points are just guidelines but the point is that your living expense should be in line with your income and financial goals.

If you find that your income is not enough to cover all of your living expenses, there are a few things you can do to help bridge the gap.

  • Reduce expenses: You can look for ways to reduce your essential expenses, such as by shopping around for better deals on groceries, insurance, and other bills.
  • Increase income: Another way to address the shortfall is by increasing your income.
  • Re-budget: Re-budgeting is key, consider prioritizing expenses, if you are in danger of falling behind on important bills like rent, mortgage, or utilities.

Remember that getting your finances in order is a process and it may take time, but by taking the necessary steps and being persistent, you can improve your financial situation over time.

Living Expenses for fluctuating Income

If your income is fluctuating, it can make it difficult to budget for your living expenses. Here are a few things you can do to help manage your finances:

  • Build an emergency fund: It’s important to have an emergency fund that can cover at least 3-6 months of living expenses in case of unexpected income fluctuations. Having an emergency fund will give you a safety net to fall back on if your income drops.
  • Create a flexible budget: It’s important to have a budget that can adapt to changes in income. This means creating a budget that prioritizes your essential expenses, such as rent or mortgage, food, and healthcare, while also allowing for flexibility in discretionary expenses.
  • Track your income: Keep track of your income and expenses to help you understand your cash flow and identify patterns in your spending. This will help you to better anticipate future income fluctuations and adjust your spending accordingly.
  • Plan for low-income periods: It’s important to plan for the times when your income is lower by cutting back on discretionary spending and focusing on paying for your essential expenses. You can also explore ways to increase your income during these periods, such as taking on a part-time job or freelance work.

It’s important to remember that managing fluctuating income can be challenging, but with the right strategies and planning you can increase your financial stability and achieve your goals.

Cutting on Living Expenses to Fit into Budget

Cutting expenses is an effective way to reduce your spending and make your budget more manageable. Here are a few strategies you can use to cut expenses and fit your budget:

  • Prioritize expenses: Make a list of all your expenses, and then prioritize them according to their importance. Essential expenses, such as rent, groceries, and healthcare, should be given the highest priority, while discretionary expenses, such as entertainment and dining out, can be reduced or eliminated if necessary.
  • Look for ways to save on essential expenses: Research ways to save money on essential expenses like housing, transportation, and groceries. For example, you can look for a cheaper apartment or negotiate your rent, cook at home instead of eating out, or carpool to work.
  • Shop around: When buying big-ticket items or making big purchases, such as furniture or electronics, take the time to shop around and compare prices. You may be able to find better deals at different stores or online retailers.
  • Create a cash envelope system: A cash envelope system is a budgeting method in which you set aside cash for specific expenses, such as groceries or entertainment, and only spend what you have set aside.
  • Review your budget regularly: Review your budget regularly to make sure you are still on track, and make adjustments as necessary. Remember to be realistic about what you can afford and be flexible with your spending if unexpected expenses arise.

It’s important to remember that cutting expenses is not always easy and it may take time, but by being persistent and sticking to your budget, you can improve your financial situation over time.

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Written by Gopesh Sharma Follow