Financial planning is a crucial aspect of ensuring a secure and stable future, and at the heart of this process lies the importance of accurately calculating living expenses. Understanding one’s ongoing costs is the foundation upon which effective financial strategies are built. By properly assessing essential needs, spending, and potential unforeseen expenses, we can make informed decisions, set realistic goals, and pave the way for a financially balanced and prosperous life.
Most of people that I helped prepare financial plan, had under calculated their monthly expenses. Primary reason being they tend to just remember expenses they do every month but do not factor in ad hoc expenses that they incur once in a year or once in several years.
Hope this article will help you understand expenses better. Also sharing simple calculator to you to record your expenses and get the real expense you should use for all further calculations.
This article is part of my attempt to help DIY or Do It Yourself investors to come up with their own financial plan.
There are mainly three types of expenses that one should consider to arrive at accurate number. A simple excel can help you calculate various expenses as they occur and arrive at realistic number. Let us look at these one by one.
1 Regular Monthly expenses
These are the expenses that we incur regularly every month and are most easy to calculate at. These include things like our bills for grocery, milk, loan EMIs, maintenance, electricity, mobile bills, children school fees, travel to office, pocket money you might be giving to your children, expenses on entertainment like cinema or mall etc.
You can keep note of these for a month or two and get a realistic number.
2 Regular Yearly expenses
These are the expenses that occur once in a year or may be quarter or so. Generally we need to observe it for a year to come up with correct number. These include things like term plan premium, mediclaim premium, car insurance, expenses on festivals like Diwali or gifts on birthdays, vacation, birthday expenses of family members especially children, approximate amount family spends on clothing in a year, some yearly maintenances of water purifier or A/c, some expenditure on repairs etc.
These are little tricky to calculate as some things like insurance premium are more or less known and in some cases like clothing, gifts etc you will need to use some judgement to arrive at number. Once you get yearly number, we need to divide by 12 and add it in monthly expense.
Though these are not monthly expenses, you need to have them provisioned in calculation. In absence of this, your number will be lower than what you need for maintaining current lifestyle.
3 Expected expenses in few years (recurring)
These are third type of expenses which are more difficult to calculate and needs some judgement of you and your family to arrive at. There are things that we do every few years. Say we paint house every five years. If you spend around say 30,000 during painting then it is 30,000 divided by 5 which is 6000 per year or 500 per month.
Why these are tricky is because there is wide difference between families how frequently they do particular expenses. One of my neighbour paints house every year before Ganesh festival so this could be yearly expense for them. For other family, this could be once in 3 or 5 years. Accordingly you will need to arrive figure for each month.
Though these are expenses that you don’t incur every month, it is important to account for them in planning. Otherwise when these expenses knock on your door, you will not have provision for them.
Some of the expenses I could guide from my experience with clients are house painting, new furniture , new mobile, new electronics like washing machine, television, some society renovation expense, some overseas vacation etc.
Each of these will be at different frequency. Buying new furniture could be once in 8-10 years but mobile could be every 3 years. So and so forth. This is the part most people struggle with as it needs some guesswork to come up with expense and frequency.
Free expense calculator
For all you DIY or Do It Yourself investors, I have created a google worksheet which you can copy and use for your expense calculation. You can enter your own description and amounts in the sheet and get the real expense number for your financial planning.
Cells in red and grey are non editable. All white cells are editable. I have given some samples for your understanding but you can add / remove to make it personalised.
Column A is to add description of expenses.
If expense is monthly then populate value in column B
If expense is yearly then populate value in column C
If expense is every few years then populate amount in column D and select number of years in column E
Some expenses are monthly as well as Yearly. Like Medicine and Doctor expense, I have put 3000 per month for regular diabetes, cholesterol etc medicines but also 6000 for say some yearly check ups. In that cases, amount should be added to column B as well as C.
Value in cell D4 gives budgeted monthly expense that one should consider for financial planning.
Following is link for calculator TechNFinance Free Expense Calculator Hope this help you calculate expenses.
Please ask questions in comments and will help in case of any difficulty.