Expense management should be taught at school. Agree? It’s undoubtedly more helpful to know as an adult than, well, ‘Mitochondrion is the powerhouse of the cell.’ Alright, jokes aside, expense management is literally what adulting is all about.
For the most part, expense management is mainly about keeping a tab on how much you should be spending and by when. Think of it like a diet plan. You have your cheat days, and you have days you work out extra hard to keep that balance going.
Let’s break this down further:
Simply put, it’s what you need to spend to get by in life. Ordering a nice dinner, buying great clothes; these are lifestyle expenses. Paying your rent or tuition fees are examples of routine or essential expenses. In short, expenses are any sort of purchase you make for a product or service. And these need to be managed so you’re not out of money at any point.
There are a whole bunch of apps you can use to track and manage your expenses. But we’ll get to that later.
Expenses can be categorized based on what they’re meant for. Here is a closer look at some common broad-category costs that every household will incur at some point.
These are the expenses you make on things that are absolutely necessary for life. They are also known as the bare necessities (remember the song from The Jungle Book?).
Expenses in this category typically include the costs of food, water, shelter, and clothing. As you can see, these costs are essential for survival. And your income should be enough to cover at least these basic costs.
Essential expenses cannot be eliminated from your budget. At best, you can work on reducing them and keeping them within some reasonable limit. Examples include:
These are the costs that you incur at your discretion. Meaning, you don’t actually need to pay for these things. If essential expenses are ‘needs,’ these are your ‘wants.’
Discretionary expenses are not a must for survival. However, they can make life simply more livable. Imagine a life without a good movie, a road trip, or other simple joys that money can buy.
Typically, you use only the disposable income you have for this. Disposable here means anything extra that’s left after your essentials are covered.
Examples include:
These costs are standard expenses that are of a predetermined, fixed amount. You know exactly how much you’re going to pay for the expenses in this category. And this makes it much easier to account for them in your budget because you know beforehand how much you need to spend on these products or services. Fixed expenses can be either essential or discretionary, depending on the actual expense itself.
Examples include:
Variable expenses are those costs that are not easy to determine upfront. The amount you spend on these products or services may vary from one month to the next.
To estimate variable costs in your budget, you could look at past records for similar expenses, like 3 months or so. You can then identify how much you tend to spend on these variable costs and budget for them accordingly.
Examples include:
These are those costs that repeatedly occur, month on month. They can be fixed or variable, essential or discretionary. But since they are recurring in nature, you know you have to account for them in advance.
Examples include:
Non-recurring expenses are rare. They do not feature in your monthly scene. And you don’t encounter these expenses often, but when they do come knocking, they can take a sizable chunk out of your savings. Think: an expensive iPhone or, god forbid, a hospital bill.
It’s always better to have a separate emergency fund for critical non-recurring expenses like:
Expense management is simply ensuring that your spending does not outweigh your earnings or mess with your investments/savings.
Here are some ways you ace your expense management game:
There are two ways to go about this: Maintain a spreadsheet (like Microsoft Excel or a Google Sheets spreadsheet) where you record every expense and categorize them.
There’s a smarter way to do this too!
Use the Fi Money app to track expenses. Each time you use it to spend on something, your transaction will be categorized automatically. Fi Money uses Machine Learning to add tags to your transaction history so you see it as a clear expense statement at any given time.
Let’s say you’ve been tracking your expenses for around 2 to 3 months. That means you have enough data to conduct an essential exercise in expense management. This exercise is identifying which expenses are not quite necessary in your everyday spends.
For instance, you may see that you’ve spent 30% of your salary on eating out. That should be an eye-opener. So you know you probably need to cut that down. Maybe do some weekend meal prep or hire a cook if you can afford one.
Impulse buying can single-handedly make your expenses skyrocket. You may not know it, but some casual browsing on Amazon or Flipkart can leave you a whole lot poorer.
That said, it’s never practical to stay too frugal. YOLO and all that. Just make sure you’re balancing your overspending in some months out with some strict saving in some other months. Remember the diet and cheat day analogy?
Everyone loves thumb rules. So how about taking a stab at one?
Let’s say you earn ₹50,000 a month. Here’s what your split could be like:
Expense management goes hand-in-hand with income optimisation. This is because there is only so much that you can do to reduce your expenses. Even the most stringent budget will be victim to rising costs because of inflation. It’s important your income is growing annually to keep with inflation, if not beat it.
Let’s say you’ve managed to control your impulsive spends and have eliminated your discretionary expenses significantly. And you’ve also got some additional sources of income. Great, but if you don’t have your debt under control, you may have little money to save or invest.
Debt management is an integral part of expense management. Here are some things you can do to reduce your debt and manage it better.
One common rule is the 50/30/20 rule, where you spend 50% of your income on your needs, 30% on wants and 20% for your future.
Expense management is a life skill. Like cooking, driving a car, or swimming. You can split up your expenses as essential and non-essential expenses. You can further split those up between recurring and non-recurring. Most importantly, keep a track of your expenses so you can analyse how you’ve been spending. You can automate your expense categorisation on Fi Money by simply opening an account.
There are two ways to go about this: Maintain a spreadsheet where you record every expense and categorise them. You can then sum up the expenses on a monthly basis and compare your spending month by month. Or you could simply use the Fi Money app to track expenses. Each time you use it to spend on something, your transaction will be categorised automatically.
Expenses can be fixed essential costs, variable essential costs, fixed discretionary costs and variable discretionary costs. Essential costs are basically the expenses that you need to survive and have a comfortable life. Discretionary costs are expenses that are directed towards things that you want rather than need.
Expense management is important because it helps you limit unnecessary spending, and keeps you from being broke. Once you manage your expenses (household), you can save more money each month. This, in turn, will allow you to achieve your financial goals faster. So, like all good things in life, this needs a little practice before it becomes a habit.
Basic expenses are those costs that you spend on things that are essential for life. The most basic heads of expenditure include food, clothing, water and accommodation.
Some common expenses in most households include everyday provisions and groceries, rent, electricity costs, water costs and the cost of fuel. Other expenses non-essential ones include taxes, flight tickets, the cost of purchasing clothes and the cost of having hobbies.
The 50-30-20 rule suggests allocating 50% of your income to meet your basic needs, 30% to fulfill your wants, and 20% to savings. The savings category includes money for achieving your future objectives as well.
