Below is a breakdown of the “average” budget percentages and approximately how much we should allocate income toward each category:
Debt Payments 5-10%
Charitable Giving 5-15%
That being said, budgets are like snowflakes; typically no one’s budget looks exactly the same as another person’s.
Let’s take a closer look at each budget category and expense…
Housing costs normally take up the biggest portion of your household budget. Let’s say you’re approved for a mortgage payment that takes up 35% of your monthly income… keep in mind that you still have to pay for utilities, including gas, electric, water, sewer, and garbage. These smaller items can add up fast. It doesn’t take long before your utility bills add up to 10% of your income. That means between only your mortgage and utilities, almost 50% of your income is already used up for the month. This is where being savvy can come in handy. Can you reduce your garbage bill by hauling it to the dump yourself once a month? Is it cheaper to rent a large dumpster that gets emptied every 3 months? Can you get a smaller cable package? Can you eliminate cable all together and stream your favorite shows online?
Transportation is normally the second largest expense in a household budget. This category includes your payments, gas, repairs, and registration. If you buy a newer vehicle to save on repair costs, registration and insurance can be quite expensive. On the other hand, if you have an older vehicle the repair and maintenance costs can seem like they’re never ending. Whichever applies to you, make sure you’re prepared for the expenses that come along with your vehicle and if you need to cut costs, look into ride sharing, taking the bus, or planning your errand trips more efficiently.
The cost of healthcare can be one of hardest categories to plan for. There are a lot of uncertainties and confusion when healthcare is discussed. Ask questions. Compare costs and plan ahead the best you can. Preventative care is 100% necessary and so important; if you can catch issues early it may save you thousands. It may not seem like a need when you’re healthy, but when you get sick it should be your top priority.
A big chunk of the household budget is eaten up (pun intended) by food. Although budgeting 15-20% of your income towards food is acceptable, it is important to watch WHERE you are spending that money. At home food consumption accounts for almost 60% of all food spending, while the remaining 40% is essentially “lost” dining out. That money you spend at a restaurant would go much further at the grocery store. So make your money work for you…make it last.
Sometimes savings is the last thing on your mind, but cars break down and people lose jobs. So you should always try to budget at least 5-10% of your income for savings. If you find that you are putting money away each month but are dipping into it to help cover your needs, some changes may need to be made. Double check your expenses…can anything be reduced or eliminated? If not, you may need to decrease your savings contributions temporarily and continue to look for ways to be able to contribute more money again.
Debt payments usually account for 5-10% of monthly income. Smaller debts can be easily tackled and quickly paid off, but others linger for years and years. Your intention may be good; you opened that credit card at 0% interest and say that you’ll pay it off before the promotion ends and the interest accrues. However, many people I see every day are unable to pay it off in time and end up paying much more than the purchase price…and continue to attempt to pay off that debt for years to come. If your debts are taking control of your life, don’t wait – seek help now.
Charitable giving includes everything from those oh-so-good Girl Scout cookies, to tithing, to school fundraisers. Keep in mind that it doesn’t always have to be cash; donating time and talent is still indeed donating! So volunteer your time instead if giving money is creating a hardship. Then, when your financial situation is stable again, look at increasing monetary donations to your liking.
Use caution when you are calculating your entertainment/recreation category. In my experience as a Financial Counselor helping people set up budgets every day, this is one category that is underestimated 90% of the time. Think about hunting, fishing, golfing, leagues, movies, concerts, camping, hobbies, and more. In some cases it’s better to use the “envelope method” for entertainment. That’s where you allocate a certain dollar amount (in a literal or figurative envelope) to these activities; once the money is gone, you stop spending in that category until next month. If you have a large expense every year at the same time, like your children’s sports’ fees, add up or estimate about how much you spend each year. Then, divide that amount by 12 and save that amount each month so that when it’s time to pay, you already have the money saved up.
How you spend your money is completely up to you. If your utilities are higher than normal one month or you want to buy something fun that isn’t in your budget, you may have to make sacrifices in other categories to afford what you need &/or want. Be sure to always prioritize, plan ahead as well as you can, and then make cuts when necessary. These are the keys to budget success.
You may have your budget under control and everything is going great, but then your hours are cut at work or an unexpected medical bill comes up. If that happens, contact LSS Financial Counseling at 888.577.2227. We can help get you back on track and create a plan to help you conquer your debt for good.