If you find yourself living from paycheck to paycheck and not setting aside enough savings for emergencies, it could be time to set up a household budget. Before you begin your budget, it’s helpful to look at how much the average household is expected to spend on housing, food, transportation and other expenses. Even if you already maintain a budget, you may want to do some fine tuning based on the guidelines.
Housing and Related Expenses
Housing is an essential item that no one can do without, and for most people it accounts for the biggest chunk of household income. The nonprofit organization American Consumer Credit Counseling recommends spending up to 35 percent of your paycheck on housing costs, including mortgage or rent, utilities, insurance, furniture and maintenance. For a household with a monthly income of $5,000, this would mean spending about $1,750 on housing.
Your other living expenses include necessities like food, clothing, health care and education. This is a category where the amount you spend may depend on where you live and how much you make, but in general it should take about 20 percent of your income. For a $5,000 monthly income, this would be $1,000.
Most people who work need to spend money to get to and from their job. This category represents about 20 percent of the average income and includes expenses for public transportation, auto loans, insurance, fuel, tolls, registration fees and parking. If you work from home or walk to work, you may be able to spend less in this category.
The ACCC recommends that households save or invest 20 percent of income. This can be a challenging goal, especially if you pay all your bills and expenses first and then try to save what’s left. Instead, take a "pay yourself first" attitude and have a fixed percentage of your salary automatically deposited in a savings account or retirement plan. Experts agree that this is the easiest way to make sure your savings grow. Even if retirement seems like a long way off, starting to save for it early will help ensure you’re financially ready when the time comes.
In an ideal world, you would only spend 5 percent of your income paying off non-mortgage debt like credit cards, personal loans, student loans and medical bills. This means spending $250 or less on debt repayment with a monthly income of $5,000. If your payments are higher, you should look into cutting spending before your debt becomes overwhelming, or consult a credit counselor to help you come up with a reasonable repayment plan.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.