The percentage breakdown of the typical American family budget looks like the list below. For most categories a range is shown. A range makes more 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, cheer up! The average American family budget is skyrocketing: we have too much debt and just don’t save enough. We’re so worried about our neighbor’s new pool, our coworker’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 elite minority of Americans who know where their money goes.
Typical Family Budget Percentages
- 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% Miscellaneous
- 4% credit card, consumer loan interest
If your budget is 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!
- Do a low and dirty budget right away! Don’t worry if it looks good at first…you can perfect it over time. Just do it!
- Cut back on your frivolous, identifiable spending habits ($3 lattes, magazines, 450 extra satellite channels, etc.). If you have expensive clothes that you’ve wanted to ditch for a while, now is the time. For example, if you are a heavy-drinking, chain-smoking, coffee-drinking fool, you can get windfall profits of up to 7% or more of your income! Simply cutting down to 2 drinks a day, just drinking coffee from home, and giving up cigarettes will make you a good amount 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 accounts and/or other investments open. If your employer has a stock matching plan, keep it in addition to 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 into a college fund for your kids, keep doing it; if you’re not and you really want to, wait until step 6. Refine your budget to reflect additional available income, if any.
- Create an emergency fund equal to 2% of your annual gross income. It should be a little hard to get (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 your debts, everything except mortgages. And don’t move 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 it owes), you can sell it and get a cheaper, more paid off car. Throw a small (inexpensive but fun) party for you and your loved ones every time you pay off a debt.
- Take all the money you WAS spending to pay off your non-mortgage debt and start putting it into those investment accounts you left sitting idle. Make sure you 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 now. If this is true and you want to invest more than 10%, go ahead, but make sure you reward yourself and live a little. Increase your emergency fund to a level you’re 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 normal party when you’re done.
- Pay off your mortgage and throw your biggest party yet! You can get started on this by refinancing to a single fixed-rate mortgage (your credit should be in pretty good shape after you’ve paid off all your other debts). 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 fixed 15 year old, wow! That’s great!
- When you’re totally debt-free, regularly give 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 across. Now start!