Essential expenses vs non essential items 

Plug non essential expenses and increase your savings

Essential items of expenditure are money spent on basic needs. Hence expenses on these items cannot be avoided e.g. food, shelter, clothes, education of children, health, etc. Non essential items of expenditure are our wants.

We want these things because we like or enjoy them but these are not necessary for our survival.

How can we manage our money?

We can manage our money efficiently by doing financial planning. As a first step of financial planning, we should maintain a Financial Diary to keep accounts of our income and expenses for a given period, say a week or a month.

How to achieve your financial goals?

Assess current financial position (Where are we today).

Identify our financial needs—[(What do we want to achieve in short term ( 1 Year), medium term (1-5 years ) and long term (more than 5 years)]

Estimate the cost of each item and the date we want to achieve it.

Calculate how much we need to save each week/month.

Maintain a financial diary—Write down weekly/monthly income and expenses.

Curb expenses—spend sensibly.

Review savings regularly-Whether it is as per plan? If not, look at expenses for opportunity areas to cut back spending and increase savings.

Determine the amount saved at the end of each week/month.

Deposit savings in a bank account.

Why to maintain a Financial Diary?

A Financial diary helps us to do financial planning. We would know how much money is being spent on essential and non essential items during a given month. This helps us to identify the items on which the expenses can be avoided or reduced. Once we know it, we can regulate these expenses. We can save this money and break the cycle of poverty.

Wants vs needs

Needs are limited


Wants are unlimited


How can we reduce expenses?

We can reduce expenses on some of the extra items by spending judiciously. This saved money becomes our additional income for spending on essential items without earning more. It is very easy to understand.

For example, if we are taking 4 cups of tea every day, then in the past 30 days (1 month) we have taken 120 cups of tea. Say each cup of tea costs us Rs. 5, then the total cost is Rs. 600. Just pause and think whether we need to drink 4 cups of tea in a day. Had we taken 2 cups of tea every day then the expense would have been Rs. 300 and we would have saved an equal amount of Rs. 300.

Here, 4 cups of tea is what we wanted but basically our need may be fulfilled with 2 cups of tea. In a way, our earning has increased by Rs. 300 in a month and in a year we have saved Rs. 3,600.

Money saved is money earned

Why should we save?

We should save regularly so that it can be used in times when our expenditure is more than our income and we need more money.

To meet higher expenses on birth, education, marriage, purchasing own house, etc.

To meet expenses on account of unexpected events like illness, accident, death, natural calamity. During the emergencies, savings can come to rescue.

Money is needed for lean periods i.e. when we are not able to earn.

Money is needed for our old age.

Money is needed to buy something which we cannot afford from regular income.

In short, when we have to spend more money than we earn, we can meet these expenses from our own money if we have enough savings.

How can we save?

The common refrain is that we do not earn enough so we cannot save. The truth is that everyone needs saving and can save. We should keep aside a portion of our earnings as saving from day one of our earning life.

The important thing is that we should start saving early and regularly in our life, even if it is a small amount. And if we get some unexpected profit/earning, we should save all or most of it. This will reduce our worries of future financial needs and help us in dealing with unexpected expenses.

If we earn Rs. 100, we can save Rs. 20 and if we earn Rs. 10, we can save Rs. 2. If we keep aside Rs. 20 out of Rs. 100 we earn, then in 5 earning days, we would have saved one day’s earning. In 100 earning days this would mean savings equivalent to 20 earning days plus interest.

Is it not amazing!

Income per day

Rs. 100

Expenses per day

Rs. 80

Savings per day

Rs. 20

Savings in a month

Rs. 20 x 30 = Rs. 600

Savings in a year

Rs. 600 x 12 = Rs. 7,200

Interest at 8% per annum

Rs. 318

Saved amount at the end of the year

Rs. 7,518

This amount is equal to 75 days income

For how long should we save?

The longer we save, the more our savings will grow. The more we save, the more we will be prepared for emergencies and non working old age and not dependent on others for meeting our needs. As our savings grow, we will not have to borrow to meet our needs. When we save for longer periods, our savings will multiply many times as it earns interest.

Amount saved every year (Rs)




No. of years saved




Amount of savings




Interest earned @ 10% p.a. (Rs.)

4.22 lakh

1.42 lakh


Total amount at the age of 65 (Rs.)

4.62 lakh

1.72 lakh


Source: Financial Literacy Guide, Reserve Bank of India

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