In this exploration of your household budget, I'd like to do three things. First, let's see where you are. If you're going to get out of debt, or keep from slipping into it, you'll need to know where you stand. Many households stay out of debt because they have a reasonable budget and they keep an eye on their income and expenses - they know where they stand.
To help you know where you are, relative to everyone else, we'll take a look at how Americans generally spend their money. This should be at least somewhat enlightening.
Next, we'll make an assessment of where you are heading. Are you heading for debt, getting deeper into it, simply treading water, or are you climbing to greater financial freedom?
Then, I'll show you what I think family budgeting should look like. Even if you're a "lone ranger", your budget should look similar.
After we get done with these exercises, you should see where there are holes in your financial boat, and where you should strive to make improvements by adjusting what you spend and what you save.
In other words, you'll decide what you'll do about your situation so you'll have greater financial peace of mind and less stress in your life.
Let's dive into a review of your household budget.
You'll need to make a realistic assessment of where you are financially if you're going to have a sense of urgency about getting out of debt or staying out of it in the first place.
Try this exercise to see what your household budget looks like, and how it stacks up when compared with others.
Get a piece of paper, a pencil and a calculator. You'll need to write down money spent in each of the following areas, expressed as a monthly average.
If you know the amounts for each sub-element in the category, then add up the numbers so you have a single figure for each overall category such as income, transportation, food, medical, savings/investment, and other aspects of your household budget.
If you know the value for the overall category, then you don't need to fill in separate amounts for the sub-elements presented.If you don't know the monthly average, then make an educated guess.
Here are the general categories of your household budget and some of the sub-elements within each.
(I assume that your tax deductions at work or your quarterly tax estimates are well targeted. In other words, you'll essentially owe nothing at the end of the tax year, or you'll get nothing back.)
Clothes and footwear:
(Special instructions for take home pay and retirement. Add amounts taken out for pensions to your take home pay as these will have to be figured into what you are spending. If you don't add these to your take home pay, the results will look like you're saving too much or you're over budget.)
Okay, all those numbers are out on the table in front of you. Now, let's see what they all mean with respect to your general spending patterns.
you look at various studies that show what Americans spend on things,
you'll get a range of numbers that are expressed as a percentage of
spending for certain categories. I've taken some of those numbers and
massaged them into what I consider to be representative values.
Here are national averages, presented from lowest amount to highest values, each shown as a percentage of take home income, with the decimal equivalent shown in parentheses for convenience:
Now, divide each of your expenses and savings/investment numbers by your monthly take home pay to see how closely you match with these percentages derived from national averages. The numbers for your household budget, as shown on your calculator, should be compared with the numbers shown in the parentheses above.
When you look at the numbers, remember this is a rough national average, and it doesn't necessarily represent the ideal. If you're within 10% of these numbers, then you're probably doing okay. I suggest that no single element of your household budget be higher than 15% of these averages.
Here is the easy way to figure how far away you are from these average household budget figures. Take the percentage that you spend in each category, expressed as a decimal, and divide into that the decimal associated with the category.
Example, let's say you spend 34.5% (.345) of your budget on housing. Divide .345 by .30 (the suggested average) and that gives you 1.15 (115%) as a result. That means you are spending 115% of the national average.
In other words, you are spending 15% more than the national average.
If your math gives you .80 (80%) as a result, then that means you are spending 20% less than the national average.
At any rate, doing what the average American does isn't necessarily an indicator that you're okay. It should be an indicator that you're following the average American, and when you think about it, that might not be exactly what you want to do - be average that is.
Here are my suggested percentages for a household budget. As you might expect, they are more frugal in nature and more aggressive in savings.
I recognize that some of these numbers can be reduced and redistributed. The first three elements of donations, entertainment and clothes are 10% of the budget and in many cases are discretionary, so those are the first categories that I would zero out if needs be.
Also, keep in mind that many factors influence how much you spend in each category of the household budget and the percentage distribution that you have for yours. Don't panic if you tip the scales in one category or another. Think about it and see if you can identify why you're heavy in one area or another, and what you might be able to do about it.
So, now you know where you are in relationship to others around the country. How do you feel about your household budget now? I hope you're feeling good about it.
Let's look at debt and see if that changes your outlook for the better or worse.
Where you are financially can now be tempered by where you are headed. Debt is a big factor - it's a ball and chain around your neck. If you're in a deep hole, are you making it deeper, or are you climbing out? You need to know so you can take appropriate action.
You've purchased or financed something and you're enjoying it, but now you have to pay for it over time - a long time for many people. As time passes, the value of what you financed may diminish, but the burden of debt will surely increase the stress on you and your household budget.
To see where you are headed, first identify every loan and credit card balance that has no fixed end date for payment. In other words, you can make minimum payments forever, and no one would care - except you and your beleaguered household budget.
Next, for each loan or credit card balance, figure what the monthly payment would be if you were to pay off the loan in 3 years. Use a credit card calculator to figure this amount. Use the quotient as a monthly figure that you'll add into your monthly budget.
I'm suggesting 3 years as a target. I'm not entirely comfortable with having credit card debt hang out there for 3 years, but many will find it difficult to pay it off sooner. Remember, the longer you let it hang out there, the longer it will needlessly consume your income.
If you don't get debt under control within a few years, it most certainly will become a long term way for you to transfer your wealth to others, and that's not a good thing to do.
Then, figure in all the monthly payments for alimony, child support, mortgage, student loans and the like that have a fixed end date.
Now ask yourself:
Here is where the rubber meets the road. You have to decide what it is you're going to do about your household budget to improve your financial situation. Is it a time to hold, cut back, or bail out?
All options are on the table. You have to decide what you're going to do. What you do will depend on how severe you see your problem (if you have one at all), and your sense of urgency.
Here is what I would consider doing to address the problem of debt, and the order in which I would do it:
To get your household budget under control, you might ask others how they do it and learn from practical example. Ask people that appear to be successful at managing a household budget. Don't ask others that are having financial troubles.
In any event, you're probably a little wiser now with
respect to where you are with your household budget, and where you are
heading. This is the main point of the discussion - awareness. Frugal
living is a bit like debt; it doesn't just happen to you, you make it
happen. Have a reasonable household budget that reflects a focus on
responsible use of financial resources, and you'll be glad you did.