Chapter 03: Managing Living Expenses with a Budget

In our budgeting series we’re covering all the basics, including how to create a budget, how to manage a budget, and how to account for living expenses. Living expenses are an inevitable part of adulthood, but knowing how much basic expenses cost will ensure you’re prepared to tackle them.

You’ll also want to prepare for the unexpected. For example, your income might be lower than you expect while some of your expenses may be higher than you anticipated. Without a solid budget in place, you may run into financial trouble or even debt.

That’s why we put together this guide to living expenses — both the expected and unexpected. We’ll cover what’s considered a living expense and how much you need. We also provide expert tips on how to reduce your monthly living costs.

With a solid budget, you’ll have enough for living expenses, unexpected situations, and plenty of fun, too. In this chapter, we’ll be going over what a living expenses budget is, how much of your income you should be spending on your living expenses, how you can make more money to afford these expenses, and more. Keep reading or use the links below to navigate through the article.

• What is a Living Expense Budget?
• What is Considered to Be a Living Expense?
• How Much of My Income Should I Spend on Living Expenses?
• What if I Don’t Make Enough to Cover All Living Expenses?
• Planning for Fluctuating Income
• Cutting Expenses to Fit Your Budget
• Stop Living Paycheck-to-Paycheck with a Good Budget

In the previous chapter, we discussed how to budget and the various items that you should include in a budget, so if you need to review those concepts before diving head first into living expenses, check out Chapters 1 and 2.

What Is a Living Expense Budget?

A living expenses budget is a budget that is based on your living expenses and your income. Your living expenses are expenditures that are necessary for your daily life and basic living, such as rent and groceries.

Having a living expenses budget will ensure that you can address your major expenses based on how much you make and what your cost of living is. It can also help you make a plan if you’re currently spending more than you’re making and need to reduce your spending so that you don’t end up in debt.

This cost of living budget will differ for each person depending on where they live and what their salary is. Cost of living varies by state, but you can try our free cost of living calculator to get an idea of how much it may cost to live in other cities. Before making any big lifestyle changes, like moving, it’s important to have an idea of how much it’ll cost to live in a particular place so you can figure out if moving is a realistic choice.

Keep reading to learn how to budget for your living expenses.

What Is Considered to Be a Living Expense?

Living expenses are expenditures necessary for basic daily living and maintaining good health. They include the main categories of housing, food, clothing, healthcare, and transportation. Understanding what’s involved in each of these areas will help you to budget for them.

Here’s a complete living expenses list that you can use when trying to decide how much to budget for living expenses:

Housing: Whether you rent or own, there are regular expenses, including some you may not be aware of.

• Mortgage payment or monthly rent
• Utilities (i.e. electricity, gas, trash removal)
• Insurance (i.e. homeowners or renters)
• Property tax
• General maintenance (i.e. lawn mowing, snow removal)

Food and grocery: Besides your daily meals, consider other living necessities.

• Food and beverages
• Personal care items (i.e. shampoo, toilet paper, bandaids)
• Cleaning supplies

Clothing: From your work clothes to pajamas, ensure you account for everyone in your family.

• Daily clothing
• Formal wear
• Undergarments
• Boots, shoes, and coats

Healthcare: Remember to include expenses for your primary doctor, dentist, and other specialists–including your veterinarian.

• Insurance premiums
• Office copays
• Pharmacy copays
• Over-the-counter items

Transportation: Depending on whether you take the bus or drive a car, add up your regular transportation costs.

• Car payment
• Car insurance
• Gas
• Public transportation tickets
• Taxi costs
• Parking fees

Miscellaneous: Some living expenses don’t fit a specific category, but still need to be in your budget.

• Cell phone bill
• Internet
• Baby or child necessities

What Is Not Considered a Living Expense

So we discussed how to budget living expenses, but what about discretionary expenses?

While there are likely other recurring costs in your life, they might not be considered as a living expense. These expenses are called discretionary costs, and they include things like recreational activities and entertainment. That means your gym membership and Netflix subscription should be accounted for elsewhere. You’ll also want to ensure your budget includes any debt repayment, such as for a student loan.

There is a lot to include in your budget, but it’s important to take the time to break down all of your expenses so you can figure out where you can cut back. Some other costs that are not considered living expenses include:

• Pet costs
• Personal care
• Holiday gifts
• Birthdays
• Donations

How Much of My Income Should I Spend on Living Expenses?

Based on your salary and the cost of living in your city, the exact amount you spend on living expenses will vary. How much you spend on rent, for example, is dependent on location and your standard of living. For instance, rent is higher in Los Angeles than it is in Detroit. A three-story home will be more than a one-bedroom apartment. Figuring out your grocery budget will depend on how often you eat out and if you use coupons at the store.

No matter your preferences or where you live, you can come up with a rough estimate for your living expenses. Focus on the main categories of housing, food, clothing, transportation, and healthcare. Look at each component and write down roughly how much you spend in each area.

In general, experts recommend using the 50/20/30 rule to create your budget, especially if you’re a young adult. The 50/20/30 guideline offers a basic financial strategy for your spending and saving. The rule says that you should spend 50% of your income on your living expenses, like your rent and car payment. You should put 20% of your income in savings, whether that’s for a rainy day fund or a down payment on a house. For the remaining 30%, put it toward personal expenses like a night out with friends or a weekend getaway.

Because the 50/20/30 rule is a guideline, there is some flexibility. You can adjust the percentages based on your unique circumstances. The main idea is to limit your living expenses to roughly 50% of your income. That way, you’ll have enough leftover for your savings and fun expenditures.

What if I Don’t Make Enough to Cover All Living Expenses?

It can be hard to afford the cost of living, especially if you’re in an entry level job or live in an expensive city. Many people — especially those early in their careers — use creative ways to make their budget work.

Get a Side Hustle

Besides trimming your expenses, consider a side hustle or working a part-time job in your free time. Even working one night a week as a waitress, babysitter or Uber driver can add up to a lot of extra cash.

You can also make money online by working as a freelancer or tutor and even completing online surveys. There are countless easy ways to make money at home, if you want to earn some additional income but don’t necessarily want to leave the house to do so.

Seek a Salary Increase

If you’re struggling to cover all your living expenses, it might be a good idea to ask your employer for a salary increase. If you can’t get a raise at your current job, you may want to try looking for a new job in the same field where you can actually get a salary bump. There are also many high-paying jobs that don’t require a degree, so even if you didn’t go to college, you can still achieve professional and financial success.

What You Should Avoid Doing If Possible

In times of financial distress, it might be tempting to do things like run up your credit card or take out a short-term loan so that you can pay for your expenses. However, doing these things will only make it harder for you to catch up to your expenses and they can even land you in debt.

Running up your credit card or taking out a short-term loan should be a last resort option that you should only do after you’ve already tried all of the above options. You’re better off taking a different route and either cutting back on some of your expenses or taking up another job so that you can make more money.

Planning for Fluctuating Income

If you have a fluctuating income, creating a budget might seem daunting. However, having a budget is crucial to ensure you don’t spend beyond your means, especially in a month where you may be making less than normal.

If your income varies from month to month, here are some tips for how you can make sure you’re able to meet your budget:

• Figure out what your basic monthly living expenses are: This includes necessary expenses only, like housing, food, and transportation.
• Calculate your monthly average spending on discretionary expenses: This includes expenses like clothing, birthday gifts, and gym memberships.
• Figure out your average income: Although your monthly income may fluctuate, try to figure out your average income and use that as the standard for your budget.

Cutting Expenses to Fit Your Budget

There are numerous easy ways to save money that just require you to make a few lifestyle changes. Here are some easy ways to cut down your living expenses in each major category so that you can feel more financially secure:

Housing

• Consider having a roommate to split costs if living on your own is too expensive
• Reduce your utilities by being mindful of water and electricity consumption
• Move to a smaller, less expensive place
• Live a minimalist lifestyle and buy less things
• Estimate your rent budget to determine how much you can realistically afford to spend on rent each month

Food and grocery

• Scale back on eating out
• Plan your meals to stretch your food budget
• Limit trips to the coffee shop
• Buy in bulk
• Purchase store brands

Clothing

• Shop at consignment stores or online marketplaces
• Build a capsule wardrobe
• Reduce unnecessary purchases

Healthcare

• Buy over-the-counter or generic brands
• Check to see if your employer offers flex spending or a health savings account

Transportation

• Shop around for a better car insurance rate
• Consider selling your car if you live in a city with great public transportation
• Buy a used car instead of a new one
• Use a gas rewards card
• Try carpooling
• Figure out whether buying or leasing a car is more economical for you

Miscellaneous

• Downgrade your cell phone service plan
• Use coupons and coupon codes
• Shop at discount stores

Be Prepared for Possible Living Expense Adjustments

Some living expenses are fixed and won’t change often, such as your monthly rent. Other expenses are adjustable, such as food and clothing. That means that your spending and savings might differ from month to month, and that’s okay. Having a budget ensures you’re prepared and in a good financial place for whatever comes your way.

Consistent saving is especially important. You’ll be ready just in case a necessary expense comes up. For example, if your car breaks down or you have a hefty medical bill, you can use your reserve or emergency fund. Rather than charging the expenses to your credit card or taking out a personal loan, you’ll be able to cover the bill.

To ensure your plan is working, revisit your budget monthly and make any necessary adjustments. For instance, you may realize you need to allocate more for groceries and less for transportation. After all, financial plans aren’t meant to be static. Life changes, and so can our budgets.

Figuring out your living expenses is a key element of financial planning. With a solid understanding of your recurring costs, you’ll be able to create a more accurate budget. You can ensure you have enough to cover both the expected and unexpected. You’ll also benefit from more financial security and peace of mind.

Stop Living Paycheck-to-Paycheck with a Good Budget

Having a good budget is one way you can stop living paycheck-to-paycheck and actually feel secure with your finances. There’s nothing worse than waking up every morning with a pit in your stomach because you don’t know if you can afford to leave the house that day. But having a budget is a good way to prevent that.

There are various ways you can go about creating a budget. You can use a template for tracking your budget, you can try out the envelope budgeting method, or you can use the 50/30/20 rule. We will be discussing more in-depth these various methods in more depth in the remaining chapters in the series.

So now that you know what a living expenses budget is and how much of your income you should be spending on your living expenses, we can now move on to the next chapter in the series: How to create a budget.