Is your household budget in line with the national averages? There’s no harm if it’s not, but most working adults like to know where they stand. It’s the same reason nearly everyone clicks the Show Averages button at the end of their tax software process. There’s more than curiosity behind the desire to examine US tax and personal budget data. By doing so, people can gain insight into where they might need to make a few changes.
If you discover that your rent expense is 50% above the norm, it’s probably a good idea to dig a little deeper into why that is so. Or if a couple explores budget statistics and finds that they are saving only a fraction of what most others sock into a retirement account each month, consulting a finance professional is probably a wise idea. While no two situations are exactly alike, it’s helpful to organize personal budgets into broad categories before looking at line items with a magnifying glass.
In addition to housing, insurance, and food, families and individuals spend their money on investing, utilities, transportation, savings, debt, and healthcare. Note that not everyone uses the same categories or terminology. However, by reviewing the national norms and percentage ranges for each area, anyone can get a better feel for whether they should adjust or get professional advice about how to proceed. Consider the following categories and the relative amount of income they account for.
Housing
Whether you call it rent or mortgage, it’s normal for housing related expenses to consume between a fourth and a third of total income. The range is 25% to 35%. What does the sub-category include? Housing is anything you pay out to sustain a living space. That can mean things like rent to a landlord, a mortgage check to a lender, homeowner association (HOA) monthly or annual fees, money spent on maintenance, property taxes, and similar items.
Insurance
Categorizing these payments is a matter of financial taste and practice. In other words, it’s common for individuals to omit the entire subject as a budget area and instead include the amounts in the appropriate line items. If you pay $50 per month for homeowners’ coverage, you could list the amount within the housing area. Assuming you list the entire category separately, it should take up between a tenth and a quarter of your financial resources.
That’s a huge range and is a testament to the differing amounts of value people give to coverage like car, home, health, and life policies, just to name a few of the sub-categories. Individuals who get tuition insurance from Earnest do so because they choose to protect their educational investment in college tuition and related costs. Anyone who is studying for a degree or the parent of someone who is in college can purchase a policy that reimburses as much as 100% of what they spend on school fees, board, room costs, and tuition.
Why do so many opt for that kind of protection? It’s mainly because life is unpredictable, and some students are unable to remain in school due to illness, accidents, or other unforeseen circumstances. When those kinds of things force someone to withdraw from an academic program, tuition insurance is the best way to protect their financial interest.
Should you buy term or permanent life insurance? Find out the main types of coverage, factors for getting approved, tax implications, and how much life insurance you may need in this Money Girl podcast episode. Listen in the following player.
Food
Everyone must eat to stay alive, but the amounts they pay to do so range from about 10% to 15% of their income. Be careful when assigning specific items to the food sub-heading of your budget. As you work to build wealth, include fast food meals you pick up on the way home from work, snacks purchased at convenience stores, restaurant spending, and virtually all money that goes toward a solid or liquid consumable, even alcoholic beverages at the local bar. Of course, it’s possible to put some food and beverage spending into the personal lifestyle file, but most budgeting veterans prefer to list it under the general heading.
Utilities
Expect to devote between 5% and 10% of your paycheck toward utilities. What’s in the broad category? While most correctly guess that it encompasses charges from utility companies for electricity and gas, there are several others. They are what you pay for internet connections, cable television, water, any streaming-type services, phone payments, and sewage fees.
One of the most common ways that homeowners keep their bills in this area as low as possible is to use programmable or smart thermostats and to place solar panels on their rooftops. Of course, the amount anyone spends on utilities is highly dependent on where they reside. Those in Kansas will probably not incur as high an expense for home heating and cooling as someone in a northern part of the country or in a place with super-hot summers, like Phoenix.
Transportation
There’s no getting around the fact that getting around costs money. But what does the general transportation heading include, and how much does the average person spend on it? The expense, monthly, is about the same as what you pay for food, 10% to 15%. However, there are numerous components besides the obvious. Transport is made up of vehicle payments, car insurance, maintenance or repairs, fuel, DMV charges, all registration-related costs, toll booth fees, ridesharing, bus passes, taxis, and any spending related to other forms of public transit.
Debt, Investments, and Saving
The average for this category is between 10% and 20% of the entire amount you spend to stay financially afloat. Credit card and interest payments are a part of the total DIS (debt, investments, and savings) line item, as are amounts you stash into emergency funds, traditional savings accounts, stock funds, precious metals, and all allotments of money to retirement accounts like IRAs and 401(k)’s.
What if you don’t have credit cards and still fail to reach the 10% minimum level? If that’s the case, consider reworking some of the other budgetary sections to get your savings and investments to where they should be. Unfortunately, many individuals who don’t use credit think they can eliminate this category altogether. The truth is that it’s wise to put at least 10% of what you earn toward retirement or long-term investment accounts.
Healthcare
While the cost of health insurance can be quite high, most US residents place those expenses under the insurance heading. So, the average of 5% to 10% for this heading encompasses amounts spent on things like urgent care, dental bills, chiropractors, prescriptions, vitamins, over-the-counter meds, special supplements, psychologists, primary care OOP (out-of-pocket) costs, supplies, other medical professionals, and all medical devices. It’s wise to keep health insurance separate from this heading to see where your health-related money goes.
Personal, Lifestyle, & Recreation Spending
The catchall heading, which accounts for between 5% and 10% of total spending, is PLRS, or personal, lifestyle, and recreation spending. What justifies sticking a particular bill into PLRS? The main criterion is that it does not fit into any other area of your budget’s line items. Suppose you collect fine wine as a hobby and occasionally consume a bottle of the stuff on New Year’s Eve, or perhaps you get a hair coloring treatment every now and then. Both of those expenses would be prime candidates for PLRS, assuming you don’t include them anywhere else in the spreadsheet.
