Essential living expenses
The spending a household needs for daily life — groceries, rent, transport, utilities — that comes after mandatory expenses but before discretionary spending in a household budget.
In plain language
A household's spending is not all of one kind. Some of it must be paid regardless — taxes, loan EMIs. Some of it is needed for ordinary daily living. And some of it can be cut if money runs short.
Essential living expenses are the middle layer: necessary for daily use, but not a legal or contractual obligation the way mandatory expenses are. Groceries, school fees, rent, transport, telephone and utility bills are the workbook's own examples.
They sit above discretionary expenses in the order a budget is worked through, but below mandatory expenses — a household cuts discretionary spending well before it touches essential living costs.
How it works
The workbook's budgeting steps deduct essential living expenses from disposable income — income left after mandatory expenses — in the third of four steps, just before discretionary expenses are deducted to arrive at savings.
In the ABC Family's sample monthly budget, essential living expenses total Rs 64,000: grocery (Rs 12,000), fees and education (Rs 15,000), rent, maintenance and other charges (Rs 15,000), transportation (Rs 10,000), telephone and internet (Rs 7,000), and utilities (Rs 5,000).
A worked example
The ABC Family's monthly essential living expenses, from the workbook's own household budget table:
| Item | Amount |
|---|---|
| Grocery | Rs 12,000 |
| Fees and education | Rs 15,000 |
| Rent, maintenance and other charges | Rs 15,000 |
| Transportation | Rs 10,000 |
| Telephone and internet | Rs 7,000 |
| Utilities | Rs 5,000 |
| Total | Rs 64,000 |
Against the family's combined income of Rs 1,37,000, essential living expenses take up nearly half. Only after this Rs 64,000, and the mandatory Rs 21,000 of PF and tax and the Rs 12,000 loan EMI, is the remaining Rs 40,000 available to cover discretionary spending and savings.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), Table 3.1 and section 3.4, place essential living expenses as the third step of the household budgeting process. Expect a question requiring essential living expenses to be totalled from a list, or one testing the correct order of deduction across all three expense categories.
Common exam traps
- Essential living expenses are not the same as mandatory expenses. Mandatory items (tax, loan EMI, PF contribution) are legal or contractual obligations; essential living items are simply necessary for daily life, but the household technically has more flexibility here than with a legal obligation.
- Getting the order wrong — deducting discretionary expenses before essential living expenses — gives an incorrect savings figure in a budgeting calculation.
Check yourself
1.In making a budget, what is left after deducting mandatory expenses from total income?
- a)Savings
- b)Disposable income
- c)Net worth
- d)Monthly surplus in hand
Show the answer
Answer: (b) Disposable income
Step 2 of the four steps is: "List and deduct the mandatory expenses from the total income. WHAT IS LEFT IS THE DISPOSABLE INCOME." Essential living expenses are then deducted, followed by discretionary expenses, to arrive at savings.
2.Which category of expenses does the chapter describe as those that can be cut if there is a need to control total spending?
- a)Mandatory expenses
- b)Essential living expenses
- c)Discretionary expenses
- d)Non-recurring expenses
Show the answer
Answer: (c) Discretionary expenses
"Finally comes the DISCRETIONARY EXPENSES and these are the expenses that CAN BE CUT in case there is need for a control on the total amount spent." Mandatory expenses must be compulsorily spent and essential living expenses are necessary for daily use.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Debt servicingAll payments a borrower owes a lender, whether principal or interest — the actual monthly outflow that every EMI, card payment and instalment adds up to, before it is turned into any ratio.
- Discretionary expensesHousehold spending that is not essential and can be cut if money is tight — entertainment and lifestyle wants, as against the mandatory and essential living expenses that come before them in a budget.
- Financial assets ratioThe share of an investor's total assets held in financial form — shares, deposits, mutual funds — rather than physical form such as gold or real estate, expressed as a percentage.
- Mandatory expensesThe first layer of a household budget: amounts that must compulsorily be spent — tax, loan repayment and provident fund contribution — before essential living or discretionary spending.