When creating a budget, people typically look at their income and expenses, and then decide how to prioritize spending and saving to fit their financial circumstances and goals. It can help to make a complete list of income and expenses as a starting point. The expenses listed may fall into two categories: basic living expenses and ones that go beyond bare necessities.
What Are Basic Living Expenses?
Basic living expenses, as the name implies, are ones necessary for daily living, with main categories including housing, food, clothing, transportation, healthcare, and relevant miscellaneous costs.
Although not everyone would define basic living expenses in the exact same way, here is a breakdown expenses to consider.
For homeowners, this can include their mortgage payment, property tax, and insurance payments, along with monthly utilities and basic maintenance costs. If living in a condo, this includes condominium fees. For renters, it can include the monthly rent payment, utilities, renter’s insurance, and any other housing-related costs they’re responsible for paying.
Food and Beverage
Basic expenses would include buying groceries for the family, but not restaurant food or other optional food or drink expenses.
This includes clothes for work and school for the family, plus footwear, underwear, outerwear, casual clothing, pajamas, and so forth. Designer clothing and other pricier items are typically not categorized in basic living expenses.
Expenses in this category can range from monthly payments for healthcare insurance, to co-pays and additional bills from doctors, dentists, specialists, and so forth. It also includes co-pays for prescription medications and over the counter meds.
Transportation expenses can include car payments and insurance, gas, and maintenance. It can also include Uber and taxi expenses, public transportation tickets, parking fees, and so forth.
Cleaning supplies for the home or apartment, personal hygiene items, cell phone and internet bills, and so forth can also be included in a list of basic living expenses.
Wants Versus Needs
The challenge, in many of these categories, can be to successfully determine which of these expenses are truly needed and which are extras that would be more appropriately categorized as “wants.” In and of itself, there’s nothing wrong with paying for “wants” that fit within the budget but, for the purposes of making a basic living expense budget, it’s important to tease them apart.
Paying a cell phone bill, for example, could be considered important for safety and to facilitate communicating with work and family. Getting the latest and greatest cell phone for its bells and whistles, meanwhile, is crossing over into a want, not a need.
In the 1970s, something called the Growth-Share Matrix was developed, and it may help people who are wondering how to categorize living expenses and then prioritize them. The process includes listing all expenses, and then putting wants in one column and needs in another. Each column can then be divided into high or low priority. So, there would be four categories:
• High-priority needs
• High-priority wants
• Low-priority needs
• Low-priority wants
Another way to name these categories is:
• Must have
• Should have
• Could have
• Won’t have
This makes it easier to see what must be paid and what is optional. When budgeting, it can make it easier to choose where to put any discretionary funds. In other words, these methods may be able to help people answer these questions: “What are living expenses that must be paid? Which ones are more optional?”
When making a budget, it’s important to also account for any credit card payments, personal loan payments, student loan payments, and so forth that must be paid. After documenting all these expenses, figuring out how to calculate living expenses is as easy as some quick math. Figuring out how to budget for these expenses is the next item on the agenda.
Allocating Your Income
Although no two financial situations or budgets are exactly the same, there’s been a long-standing rule of thumb that says people shouldn’t spend more than 30% of their after-tax income on housing.
In September 2019, the U.S. Bureau of Labor Statistics released how people in the United States are spending their income, percentage-wise, in key categories. Here is an overview:
• Housing: 32.8%
• Transportation: 15.9%
• Food: 12.9%
• Personal insurance/pensions: 11.9%
• Healthcare: 8.1%
• Apparel and services: 3.0%
This accounts for nearly 85% of what people, on average, have been spending. It shows that, on average, people are slightly above the recommended percentage for housing expenses.
Types of Budgeting Methods
There are numerous ways to craft a budget; in fact, we’ve created a guide to cover the different types of budgeting methods. One of the keys to effective budgeting is picking a strategy that allows for consistency. The following methods could help an individual create a budget.
For people who have divided up their expenses into needs and wants, proportional budgets may make sense. This is a budgetary strategy where monthly income is divided into three categories:
In one type of proportional budget—the 50/30/20 rule featured in All Your Worth by Elizabeth Warren and Amelia Warren-Tyagi—50% of income would go towards needs; 30% towards wants; and 20% towards savings. It typically makes sense to do this calculation with after-tax income, which is take-home pay.
Advantages of a proportional budget include that it’s a simple formula, which may make it easier to stick to. Plus, it keeps a focus on the big picture, clearly distinguishing between needs and wants. It can also be a useful method for people who want to save money in a straightforward way.
This budget method may not work well for people who are still working on separating needs from wants. And, if a person’s needs currently take up more than 50% of income earned, then the 50/30/20 percentage breakdown may work as a goal to work towards—but not as something that can be fully implemented right away.
This is a granular method where you keep tracking of budget items, line by line, in relevant categories. This can be helpful for people who want to keep their focus on spending money on basic living expenses because they can easily see how much of their money is going into what category. This is also an easy method to create and use, but it doesn’t necessarily have a focus on savings, and it is more time intensive to manage.
This may be the most hands-on way to manage money. People using this method withdraw enough money from the bank each month to cover each budget category. Then, they put the appropriate amount for each category in a separate envelope: housing expenses in one, grocery expenses in another, and so forth.
Then, once a particular envelope is empty, then no more money can be spent in that category for that month, unless cash is taken from another envelope, which reduces the amount that can be spent on that envelope’s category. This method can work well for people who appreciate a tactile way of handling money. The need to get cash from the bank each month does add a step to the process and, like the line-item method, it doesn’t address savings.
When creating a budget, it often becomes apparent how there are expenses that can be eliminated or at least reduced. For example, if internet access is a necessary expense for someone, perhaps because they sometimes work from home, there still may be ways to find a more cost-effective service.
It also generally makes sense to incorporate savings into a budget. First to build an emergency savings account and then to save for other personal goals, including for retirement. Although the proportional budget described above has savings as an integral part, the line-item budget and envelope budget don’t. But, a line can be added for savings—and an envelope can be added to the monthly pile.
Consistency also counts. Big time. When budgeting is a part of daily life, it can make it much easier to reach financial goals than when it’s a sporadic activity. If budgeting fades from focus for a month, don’t quit. Get right back on track.
Finally, when help is needed, ask for it.
A SoFi Money® cash management account provides a comprehensive option to spend, save, and earn all in one product—and it can help to keep budgeting on track. With this cash management account, users can see, each week, what spending looks like and adjust, as needed, to meet personal financial goals.
Account holders can create individual financial vaults in a single SoFi Money account. In other words, it allows people to create different umbrellas within the account so there is even more clarity on spending, savings, and earning. Each vault can be named(such as Housing Expenses or Savings) and, each time someone logs into their account, they can instantly see what’s in each vault and track savings progress. Account holders can also set up direct deposit and then easily allocate money to different vaults as they see fit.
SoFi Money has no account fees and cash can be withdrawn free at more than 55,000 ATMs around the world. Plus, to help members with budgeting, SoFi offers financial advice to members at no cost, including to create a plan to help reach individual financial goals.
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