The percentage breakdown of the typical American household budget looks something like the list below. For most categories a range is shown. A range makes the most sense to help you see where your personal budget fits (or doesn’t fit). If your budget doesn’t fit the typical American household budget, rejoice! The average American family budget is skyrocketing: We have too much debt and we just don’t save enough. We’re so worried about our neighbor’s new pool, our co-worker’s new car, and our friend’s new designer shoes that we spend more than we earn to try to keep up. But cheer up! Review the percentages below, compare your household budget, and then read on to find out how you can become part of the minority elite of Americans who know where their money is going.
Typical percentages of the household budget
- 33-38% Housing (59-66% of this is housing: mortgage interest, property taxes, repairs, rent, and other items)
- 15-19% Transportation (up to half of this is vehicle purchases – 2 cars per household on average)
- 13-14% of food budget (55% at home, 45% away)
- 0-2% alcohol
- 0-3% Tobacco and related products
- 0-2% Caffeine related products
- 4-5% on clothing and related services (dry cleaning)
- 4.5 – 6% in health care out-of-pocket
- 9% Personal Insurance and Pensions (breakdown: 1% life and other personal insurance, 7.5% Social Security, 0.5% investment
- 5% Entertainment
- 2.5% charitable contributions
- 2% Reading and Education
- 1% Personal care products and services
- 2% Various
- 4% credit card, consumer loan interest
If your budget is getting too close to the previous one, here’s what you can do to fix it. Do this in order. Do not proceed to the next step until you have addressed the current step:
- Stop using your @#!&*! Credit cards!
- Budget low and dirty right away! Don’t worry about it looking good at first…you can perfect it over time. Just do it!
- Cut back on your frivolous and easily identifiable spending habits ($3 lattes, magazines, 450 extra satellite channels, etc.) If you have expensive clothes you’ve been wanting to get rid of for a while, now is the time. For example, if you are a chain-drinking, chain-smoking, coffee-drinking fool, you can make a windfall of up to 7% or more of your income! Just cutting down to 2 drinks a day, just drinking coffee from home, and quitting cigarettes will net you a nice chunk of extra money and add years to your life! Refine your budget after eliminating what you can.
- Reduce your 401K and other investment payments (if you have them) to the minimum allowed to keep your 401K and/or other investments open. If your employer has a share matching plan, keep it beyond the minimum to keep your investment accounts open (but only up to the minimum you need to get all the matching money). You will get many more benefits. in paying off your debts than you can reasonably expect to get from traditional investments. If you’re paying for your children’s college fund, keep doing it; if you’re not and really want to, wait until step 6. Refine your budget to reflect additional income available, if any.
- Create an emergency fund equal to 2% of your annual gross income. It should be a little hard to come by (like a separate checking account or mutual fund), but not too hard (Certificate of Deposit). Include this in your budget: it is very important. You won’t believe how much stress will melt away when you do this.
- Pay off your debts, everything except your mortgages. And don’t roll your revolving debt into a second or third mortgage, that’s bad. Pay them off using a fast debt payment system. Pay off any student loans (for future reference, this is a bad idea). Also pay for your car(s). If you’re not upside down with a car loan (your car is worth more than you owe), you can sell it and get a cheaper, more affordable car. Throw a small party (inexpensive but fun) for you and your loved ones every time you pay off a debt.
- Take all the money you WERE spending to pay off your non-mortgage debt and start putting it into those investment accounts you left dormant. Be sure to invest at least 10% of your gross income. If you followed steps 1-4 exactly, you should have plenty of breathing room in your budget by now. If this is true and you want to invest more than 10%, go ahead, but make sure you reward yourself too and live a little. Increase your emergency fund to a level you are comfortable with (2 or more months of income is a good start). If you have young children and want to send them to college, start putting money into a college fund of your choice for them, if you haven’t already. Throw a larger-than-usual party when you’re done.
- Pay off your mortgage and throw your biggest party yet! You can start this by refinancing into a single fixed-rate mortgage (your credit should be in pretty good shape after you’ve paid off all your other debt). If it’s a 30-year mortgage, pay more than your monthly payment to drastically reduce the amount of interest you give the bank. If it’s a 15 year old fixture, wow! That’s great!
- When you’re totally debt-free, regularly give away what you think you can afford. It’s good for the soul!
Easy? Not worth it? Doing the above will pay dividends in your life in many more ways than just dollars and cents. You will ensure a dignified and financially secure retirement. Get this right and you’ll also build a way for your children and grandchildren to enjoy a prosperous life, and they’ll remember you with fondness and respect long after you’ve moved to the other side. Now start!
