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Understand your expenses

Wednesday, June 23, 2010

AS debt goes up, it becomes more and more difficult to get back to financial stability. Before one loan is paid up, there is a new one waiting. How do one escape from it? It’s very crucial here to understand how expenses behave in order to live a life free from debt.

After knowing how to add income, the next step is to analyse expenses. I shall divide personal expenses into two categories: one essential expenses and other optional expenses. Essential expenses are the ones you cannot avoid at any cost. These include expenses for food, clothing, housing, education, etc., which are necessary for living a life of acceptable standards. Optional expenses are not a necessity. In fact, it is incurred because one has money available in cash or other form, and there is an impulse to spend it. For example, impulse shopping decisions like purchase of branded high-cost items, going out for frequent parties and food at restaurants. They are not essential expenses, but incurred out of some desires.

There is little one can do in managing essential expenses. And so, the future of your financial status depends upon your current level of optional expenses. I often hear people saying, “I am earning well or I have rise in income, but I don’t know where my money goes. Nothing is left at the end of the month in my bank account.” To all those who says so, have a close check at your optional expenses.

There are many tools available to keep a track of your personal expenses. You can even use some of them on your mobile. The free personal expense tracker can be downloaded from internet.

Here are some tips on how to track personal expenses and use it constructively to achieve financial freedom.

• Decide on how you want to track personal expenses. It can be with your personal diary, on mobile or your personal computer with the help of an excel sheet. You can download one of the free software available on internet.
• Whichever tool you choose, don’t forget to divide your expenses into essential expenses and optional expenses. It is one of the important steps in achieving financial freedom.
• Record all expenses at appropriate places as per the personal expense tracker. Record all cash and bank expenses. Verify your bank transactions with bank statements and credit card statements.
• Analyse your expenses. In a few months time, you will be able to take appropriate decisions as to how to manage your expenses in order to save more.


An illustration

ROSY Arora is working in a multinational company, earning a salary and perks amounting to Rs. 30,000 per month. She has been working for the last two years. She is stable with her job and has a bright chance of a salary hike in near future. Earlier, she was saving Rs. 8,000 every month, but when she started tracking her expenses, in three months she was surprised to know how she could save an additional Rs. 5,000 every month without impacting her life. You can do the same as well.

Next time we will look at the various kinds of expenses, and how it affects your pocket.

(Jigisha Shah is a trainer and conducts money workshops for youngsters. Send your feedback on )


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