Budgeting Terminology You Should Know
Budgeting guidelines use all sorts of terminology. Here are the most important ones you should be aware of as you start crafting your own budget.
Essential Expenses
Essential Expenses are those you cannot reasonably live without. What does that include? That’s where money is more of an art than a science and is different for everyone.
For example, most agree that your mortgage payment falls within the essential category. What if your mortgage payment is from an 8,000-square-foot home with a pool and private tennis court? Essential or not?
Generally essential expenses include the following:
Anything related to maintaining a residence.
Mortgage or rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees.
Generally, groceries only. Dining out is typically only included if necessary for your living situation.
Health insurance premiums, out-of-pocket expenses, prescriptions
Car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
Daycare, tuition, and fees. If you have children, you have to take care of them.
Credit card payments, student loan payments, child support, alimony, and life insurance
Discretionary or Lifestyle Expenses
Discretionary or Lifestyle Expenses are those expenses that are Not Essential. If you can live and work without them, they are discretionary. Dining out, vacations, entertainment, etc., are all found in the discretionary spending category.
Gross Income vs. Net Income
Gross Income is just all your income before any deductions are made for things like taxes or insurance. Total salary, bonuses, self-employment income, etc. Gross income is also sometimes referred to as “Pre-Tax Income”.
Net Income is more complicated to address. When looking at the different popular budgets below, most are based on Net Income which most will say is your “Take Home Pay.” You’ll want to be clear about what is included or excluded in Net Income when implementing your budgets as factors like tax withholding (varies by income and situation), savings, medical premiums, and life insurance premiums can change it.