The Millennial’s Guide to Personal Expenses in 2020
Personal expense management will become an important part of your life as you get older. If you want a healthy financial future, you need to know what these expenses are. Not only that, but you also need to know why you must correctly calculate them when taking out loans, paying taxes, and planning your future.
In this guide, you’ll get some quick answers to some of the most common questions about personal expenses:
- What are Personal Expenses and Why Do They Matter?
- Can Loans be Used to Cover Personal Expenses?
- Can Personal Expenses be Expensed?
- Can Student Loans be Used for Personal Expenses?
What are Personal Expenses and Why Does It Matter?
What are personal expenses? Personal expenses include any costs that are not part of your business or investment expenditures. Your rent and car payments are both personal expenses, and so is the money you spend on as food, gasoline, and entertainment.
It also covers a lot of costs that don’t feel as optional, such as medical insurance.
Why does the amount of your personal expenses matter? It matters because you need to be able to separate personal costs from your other costs for budgets, taxes, or loans. Here’s how the concept applies in each case:
Personal budgets: One of the main reasons to develop a budget is to fully track and eventually control your personal expenses. These expenses can be very effectively cut down with the right plan in place. First, though, you have to find out how much you’re spending.
Tax Preparation: If you are filing personal or business taxes, it’s important that you be able to separate nondeductible personal expenses from the rest of your costs. If you fail to do so, you may overpay, be forced to pay penalties, or attract an unpleasant IRS audit.
Loans and Credit Lines: It’s important to determine what is considered personal spending before applying for loans or credit lines. The funds from some loans cannot be used for personal expenses.
In each situation, you need to be precise. Labeling personal expenses incorrectly as business expenses on an official IRS form can lead to fines or criminal charges.
Can Loans be Used to Cover Personal Expenses?
Not all loans can be safely used to cover personal expenses. To qualify for many types of loans, you’ll need to sign a statement agreeing to use the money for specific purposes. Each loan offer is different. Yours may include terms that prevent you from using any of the funds for your day-to-day charges.
In some cases, using loan money improperly is not just a contract violation, it’s a crime that can be prosecuted as fraud. You can avoid the risk of using loan funds improperly by taking out loans that are meant to be used for personal expenses.
Do loans exist just for personal expenses?
Yes, you can take out a loan for personal expenses.
Personal loans are one type of loan that can be used for personal expenses. Most loan offers of this type do not restrict how you use the funds once you have been approved.
These types of loans are not secured. That means that they don’t require collateral (like a home or car loan), but they are also more difficult to apply for as a result. Getting approved for large personal loans often requires exceptional credit.
Which loans cannot be used for personal expenses?
While personal loans can be used to cover personal expenses, many other types of loans cannot.
In certain cases, personally using the funds from loans can put you in serious legal jeopardy. For example, you may be committing a criminal act if you use any funds from business loans or business credit cards for personal expenses.
If you use business loan funds for personal spending, you can be charged with bank fraud. This restriction applies to funds from lenders and funds that were distributed by federal assistance programs.
Can Personal Expenses be Expensed?
To ‘expense’ something means to label it as an expenditure that adds no value. This is an important concept in business taxes because expensed costs (that create no profit) can be written off on taxes.
As an example, imagine you have a company truck that breaks down on the job. Repairing the truck is a necessity, but isn’t an investment into your business. Instead, it’s just a restoration of the asset you already paid for. That’s why it can be written off.
Most personal expenses are not deductible because they are considered a choice, not a loss resulting from the operation of a business or investment. However, that doesn’t mean you can’t figure out how to expense personal expenses. Depending on where you live, you may be able to deduct:
- Medical expenses: You may deduct total medical care expenses that exceed a certain percentage of your adjusted gross income (AGI). The percentage was 7.5% of your AGI in 2019 and 10% in 2020.
- Paid personal property tax: You may be able to deduct personal property taxes that you’ve already paid from your federal tax returns. These are the annual taxes paid for personal-use vehicles, boats, and other property.
Can Student Loans be Used for Personal Expenses?
Student loans and aid can be used for some, but not all, personal expenses. To complete a student loan offer, students often need to sign a statement certifying that the money will only be spent on qualified education expenses.
The expenses that are qualified may vary from loan to loan, but they are designed to cover the standard personal expenses for college students.
Typical qualified expenses include:
- Meal Plans
- Education tools such as computers
Alternatively, many costs are not considered to be qualified expenses. These include:
- Pets & Pet care
- Paying off credit cards or personal loans
Students can be audited on their use of funds. If money is improperly used for non-qualified expenses, penalties may apply—up to and including disqualification from federal loan programs.
Master Your Personal Expenses
The first step is understanding what your personal expenses are and how to separate them from the other costs in your life. When you can do that, you’ll have a much clearer picture of your financial future.