What Are Considered Allowable Living Expenses?

Living expenses are the funds required to maintain a standard of living. These costs form the basis for creating a budget, planning for future goals, and managing cash flow. Understanding the components of these expenses is a step toward gaining control over one’s financial health.

Primary Categories of Living Expenses

Housing

Housing costs are the largest expense for most households. This category includes the recurring payment for rent or a mortgage, which is composed of principal, interest, taxes, and insurance. It also encompasses property taxes and premiums for homeowner’s or renter’s insurance, along with maintenance and repair costs.

A mortgage payment is a fixed amount, providing predictability in a budget. In contrast, property taxes and insurance premiums can change annually. Maintenance is a variable expense, ranging from minor repairs to significant system replacements.

Utilities

Utilities are the services required to make a home functional. This includes payments for electricity, natural gas, water, and sewer services. Internet and mobile phone services are also considered standard utility expenses, as they are necessary for work and communication.

These expenses are primarily variable, as consumption directly impacts the monthly bill. For example, electricity and gas costs often rise during summer and winter months due to heating and cooling needs. Some providers offer budget billing plans to level out payments, but the underlying cost is still tied to usage.

Food

Food expenses cover the cost of groceries for preparing meals at home as well as money spent on dining out. This category offers significant opportunities for discretionary choices, and the amount spent can vary based on dietary needs, family size, and lifestyle.

This area of spending contains both necessary and discretionary elements. The cost of basic groceries is a necessary, though variable, expense. In contrast, frequent dining at upscale restaurants is a discretionary choice that goes beyond basic sustenance.

Transportation

Transportation costs include all expenses related to getting from one place to another. For vehicle owners, this means car loan payments, fuel, auto insurance, registration fees, and maintenance. For those who use public transit, it includes the cost of fares for buses, trains, or ride-sharing services.

Transportation involves both fixed and variable costs. A car payment is a fixed monthly obligation. Fuel costs fluctuate with the price of gasoline and the amount of driving, while insurance premiums can be adjusted periodically by the provider.

Healthcare

Healthcare expenses are an unpredictable part of a household’s budget. This category includes monthly premiums for health insurance policies and out-of-pocket costs such as deductibles, co-pays, and prescription drugs.

These costs can be difficult to plan for, as unexpected illnesses or injuries can lead to substantial bills. Even with insurance, out-of-pocket maximums can represent a large financial burden, making healthcare a highly variable expense.

Personal and Family Obligations

This category covers a range of expenses related to personal and family life. It includes minimum payments on debts such as student loans and credit cards, which are legal obligations. It also encompasses costs for childcare, clothing, and personal care products.

Within this category, there is a distinction between fixed obligations and discretionary spending. Minimum debt payments are a fixed expense until the debt is paid off. Spending on clothing and personal care has both necessary components and discretionary elements.

What Is Not Typically a Living Expense

Certain financial outlays are excluded from the definition of living expenses because they relate to wealth-building, asset acquisition, or spending that extends beyond necessity.

A primary exclusion is savings and investments. Contributions to retirement accounts like a 401(k) or an IRA, as well as deposits into brokerage accounts, are not considered living expenses because they are designed to build future wealth.

Large, one-time capital expenditures are also not classified as living expenses. This includes a down payment on a home or a major home renovation that increases property value. These are transactions that convert cash into an asset, rather than an operational expense.

Finally, discretionary luxury spending is often set apart. Extravagant purchases like luxury cars or fine art are viewed differently from normal entertainment. In formal financial assessments, such as for a loan or in bankruptcy, these may be deemed non-essential.

Contextual Definitions for Financial and Legal Purposes

The definition of living expenses becomes more specific and regulated in certain financial and legal contexts. In these situations, “allowable living expenses” are determined by external rules and standards rather than personal discretion to make objective financial assessments.

Loan Applications

When applying for a loan, particularly a mortgage, lenders calculate a borrower’s debt-to-income (DTI) ratio. This ratio compares total monthly debt payments to gross monthly income. Lenders look at a front-end ratio, which only includes housing costs, and a back-end ratio, which includes housing plus all other recurring debt payments. Standard living costs like utilities, groceries, and fuel are not included in the DTI calculation.

Bankruptcy Filings

In bankruptcy proceedings, the court analyzes a debtor’s income and necessary living expenses to determine their ability to repay creditors. The U.S. Trustee Program provides official expense standards for these calculations, based on the IRS’s Collection Financial Standards. These standards provide allowances for expenses like food and housing, with amounts varying based on family size and location. Expenses that exceed these standards may be disallowed unless proven necessary.

Insurance Claims

In homeowners or renters insurance, “Additional Living Expenses” (ALE) is a type of coverage. If a policyholder is displaced from their home due to a covered event like a fire, ALE coverage reimburses them for the extra costs incurred to maintain their normal standard of living. This can include hotel bills, the increased cost of restaurant meals, and laundry services. ALE does not cover ongoing expenses like a mortgage payment, but the incremental costs from being unable to live at home.