How to Identify "Essential" and "Non-Essential" Expenses

How to Identify
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Get closer to your retirement savings goal by taking control of your household expenses. According to Iowa State University consumer economics professor Tahira Hira, Ph.D., you must understand your current spending habits. This way, you clearly identify any funds you can use to eliminate debt and increase your nest egg. She recommends recording everything you spend for four weeks. Knowing where your money goes empowers you to create a budget that focuses on your priorities.


Label the envelopes, labeling one for each week. Use the envelopes to keep receipts from cash, credit card and check purchases.

Record every purchase and expenditure by week, regardless of size, purpose or payment method in your notebook, including automated bank payments. If you bought coffee and a newspaper when you filled up the gas tank, note these three expenses separately for an accurate spending picture.

Cross-reference your receipts with your notebook entries at the end of the week to make sure you account for every dollar spent. Enter any missing receipt amounts in your notebook.


Categorize the expenses from your notebook at the end of the week. Consider common categories, such as restaurants/eating out/snacks, entertainment, rent/mortgage, groceries, gifts, repairs/maintenance, insurance premiums, postage, home heating, electricity, water/sewage, ATM fees, personal care, dentist, credit card payments, cable/Internet/phone, loan payments, savings, bus fare, charitable donations and fuel.

Total the amount you spent in each category. At the end of the four weeks, calculate the monthly category totals.

Determine which of your categories are essential expenses. University of Florida Family, Youth and Community Sciences defines essential expenses as legal obligations, such as child support or student loans, consumer debt and costs incurred to maintain your well being and health. They also include housing, food, medications, health insurance, utilities and transportation as essential.

Identify all non-essential expenses next. Consider your non-essential purchases to be your “wants” — those luxuries you don’t really need, occasional splurges or impulse buys.

Prepare your worksheet. List your essential categories and corresponding monthly expenditure and calculate the total amount spent. Repeat for your non-essential categories.

Add your essential and non-essential expense totals. Subtract from your monthly income. What is left represents your discretionary income -- money you can set aside for additional savings or debt retirement.

Identify Savings Opportunities

Review your non-essential expenses to find opportunities to save. The Federal Deposit Insurance Corporation’s (FDIC) Luke W. Reynolds suggests considering ways to reduce unnecessary expenses such as bank fees, as well as the cost of necessities.

Comb your essential expenses for savings potential, too. Turning off lights when not in use keeps electricity bills down, while increasing deductibles may make sense to curb insurance costs.

Put any salary increases, bonuses or cash gifts into your savings program.


  • Keeping track of how much cash you have in your wallet helps you monitor cash purchases in case you forget to write these down.

    Clothing represents an expenditure that could be classified as both essential and non-essential. Consider allocating a portion of your clothing purchases to your non-essentials.

    Some essential expenses are fixed, that is, they remain constant month after month. Others, such as utilities, may vary each month. Estimate a monthly cost for such variable essential expenses to prepare your working budget.


  • Increasing deductibles may save on insurance premiums, but reducing or dropping insurance coverage could have devastating consequences in light of an accident or illness, cautions FDIC Senior Community Affairs Specialist Mary Bass.