Breaking Down the Budget–How Much Should You Spend?

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How much of your income should you live on? And what does the budget break down look like? The answers may vary from household to household based on individual circumstances, but let’s discuss some generalized percentages as a framework to start from.

According to a survey conducted last year by the Federal Reserve Board, when faced with a $400 emergency, 47% of Americans could not come up with the money, or would need to borrow money or sell a possession in order to do so. Almost half of America lives paycheck to paycheck. Let that really sink in: almost half of us are spending 100% (or more) of what we make. Obviously, that’s far from optimal. We need to do a better job of allocating how much to spend (and where) and how much to save.


As I’ve stated previously in this budgeting post, zero-based budgeting means each dollar you bring in has a job to perform. So, you are “spending” 100% of what you make, but some of those dollars are not actually being spent, but rather saved. The biggest portion of most budgets is housing so that’s where we’ll start.


A Man’s Home is His Castle…

But please don’t spend like it’s a castle! There’s a rather large range for housing expenses. Experts have stated anywhere from 25-40% of your income should go towards your housing costs. This includes your rent or mortgage, Homeowner’s Association (HOA) fees, rental or homeowner’s insurance, Private Mortgage Insurance (PMI), property taxes, etc. I would suggest sticking towards the lower, more conservative end of that range. Life happens; job loss, disability, medical bills, and more could have a major, unforeseen impact on your budget. Having some wiggle room may make the difference in being able to keep your home in times of financial strife.

Even if you’re fortunate enough to avoid those types of calamities, you can’t control (much) the rise in insurance rates. You may not think they’ll raise enough to make a difference, but take it from me first hand, they can. I’ve lived in my current home for almost 7 years. Because we built this house, our homeowner’s insurance rate was discounted the first few years. Then our area experienced some tornadoes and hailstorms that set off a firestorm (pun intended) of damage claims, mostly for costly roof repairs and replacements. Between the expiration of our discount and the rise in claims in our area, our rate has now doubled in a short time, even though we were claim free. You can shop around for insurance, sure, but given the circumstances behind our particular rise in costs, no better rates could be found.

And what cost can you control even less than a market product? Government, namely taxes. What goes up usually doesn’t come back down in the realm of taxes. Think property taxes remain stable? Ha, that has not been our experience unfortunately. Our local property taxes consist of a school district portion and a county/municipal portion. Our county/municipal taxes have remained pretty stable over the years, but our school taxes (the heftier portion of the total tax bill) on the other hand, have done nothing but go up. 6 out of 7 years in fact, they have been raised (with another looming this year too). Some raises were bigger than others, but little by little our total tax liability has now increased by almost $1,000 since we built. That’s a significant increase in a short time. That coupled with the insurance increase has raised our monthly housing cost from 28% to 30% of our income. If we had not been so conservative when building, we could be really strapped right now due to cost increases outside of our control.

One other tip, sometimes it costs more to escrow your taxes. When we bought our first house, we didn’t have a 20% down payment so we were required to escrow our taxes. And after the property taxes were paid from the account the following year, there wasn’t enough money in it to keep the account balance from falling below zero once the first set of taxes had been paid. To rectify that, the escrow company increased our payment. For instance, instead of sending in a $200 payment every month to pay for $2,400 a year taxes, we would have to send in $300 a month payment and the extra money just stayed in the escrow account, earning us zero interest. On our current home, we do not hold an escrow account to avoid that situation. We must be disciplined enough to calculate how much to contribute to a savings account each month in order to cover our tax bill when it arrives. It’s more awareness and organization on our end, but we reap the interest earnings and smaller payments.


Ma, the Meatloaf! We Want It Now!

Ah food, glorious food! If only we didn’t need food to survive, I surmise many more of us would be wealthy! I swear, my 4 kids are between the ages of 1 and 11 and they attack the grocery bags as soon as I walk in the door. I have (semi) jokingly told my family that they should just start getting us grocery store gift cards for all occasions because we’re gonna need ‘em soon!

The consensus is food costs should take up 5-15% of your monthly budget. Of course, depending on your family size and income, you’ll need to find a figure that works for you. Then challenge yourself to knock a percentage off. 15% of a $5,000 monthly take home for a 2-person household is $750 and pretty ridiculous I think, but maybe not so for a family of 6 or more. 15% is probably high for anyone other than a very large family. Strive to make 10% the most you ever spend on food to give yourself flexibility in your budget.

We used to spend 10% as a family of 4, but even after adding 2 additional people (who granted are still small), we have managed to get our food costs down to 8-9%. Clip your coupons, buy generic, learn to garden, make those meal plans, limit dining out. You can do it! For more help, check my related posts here and here.


You Get a Car, You Get a Car and You Get a Car!

10-15%, that’s what you should budget monthly for transportation. Consider the bus, a carpool or simply shop around for better auto insurance rates. Be a safe driver to get the best rates! Download the Gas Buddy app to try and find the cheapest fuel prices nearby. The biggest help to the budget–try to get off the car payment cycle. Think it’s not possible? Read this to see how we did it and try it out for yourself. Now that we are car payment free (and my husband has remained accident-free for some time—knock on wood!), our monthly transportation costs are down to 3% a month.


Touch the Thermostat, I Dare Ya…

Try to keep those utility costs at 10-15%. If you live in a state that allows energy choice, then take advantage of it. Shop around! We use Ambit Energy for their Guaranteed Savings Programs. Can’t get much better than a guarantee. If you want more information, I wrote an entire post about how we cut our utility costs. We currently spend just 4% of our monthly budget on ours…and I keep the thermostat on 72 degrees in the winter (and the fall…and the spring).


Can Your Spare Some Change?

Not just loose change…10% is the general recommendation for charitable giving. If you’re really struggling financially, then you’ve got to put the mask on yourself before you can help anyone else. But don’t wait until you’re completely out of debt to give back either. Caring for others can help you focus on the bigger picture and have more gratitude for what you have. Some charities can do amazing things with even a small amount of money. Don’t think what you can afford to give doesn’t matter. A single $25 gift to your local food bank could provide as many as 125 meals for the needy. That means even a $5 gift could provide 25 meals…that’s truly amazing!


Paging Dr. Oz!

No, please don’t; find yourself a real doctor. Then try to allocate 5-10% for medical expenses. Shop around on the marketplace or through cost-sharing programs for healthcare if you’re self-employed. Securing a high-deductible plan from your employer is generally the cheapest route for monthly insurance costs. If you do choose this plan, understand what you’re getting. If you have a $3,000 family deductible, that means any time a member gets acute (not preventative) medical treatment, you will pay 100% of the bills until you reach that $3,000. Then you’ll pay a percentage (we have a 90/10 plan so the plan pays 90% and we pay 10%) up to the out-of-pocket max. This could quickly wipe you out if you don’t have a Health Savings Account (HSA) funded and end up sick or hurt. Medical debt is the number one cause of bankruptcy. Protect yourself by saving even if you’re healthy. You never know how quickly your situation can change.

This man went to medical school?!


A Penny Saved is a Penny Earned

Dave Ramsey recommends 15% for savings (the average American saves just 5%). Take advantage of any employer match on a 401K or 403B. Make sure to also fully fund a Roth IRA (if eligible) for yourself and spouse. If your children are of working age, encourage them to do the same. Get them started on saving early so it’s an ingrained habit.

Make sure you have an emergency fund. Dave recommends starting with $1,000 then progressing to 2-6 months of expenses. Suze Orman says at least 8 months. Go with your gut on the upper threshold, but I’d stick with a minimum of 3 months.

Wherever you are with your savings percentage, try to increase it at least one percentage every year. If you get an annual raise of 3%, then time your savings increase to your raise and you’ll never feel the pinch of saving more. We currently have a savings rate of 30% and it took us a while to work our way up there. There are many others who have savings rates of 40, 50, 60% and beyond.


Final Pieces of the Pie

Try to keep those new threads purchases to 2-7%, debt payments to 5-10% and personal/recreation costs to 5-10%. Go through your monthly budget and do the math on the percentages. In case you need a math refresher, you just divide your category spending by your monthly income to get the percentage. For example, $100 a month on clothes divided by a $2,000 a month income is .05 or 5%.



Does your spending break down to fit into all of these recommended budget percentages? Have any different recommendations you go by? Any surprises when you did the math? Tell me about it in the comments!

About The Author

Amy Davis

This post may contain affiliate links which help me keep the site running. All opinions and recommendations are 100% mine. I never recommend something I haven't tried and used myself.

I’m a former therapist turned stay-at-home mom sharing my tips and strategies to achieving freedom from debt. When I’m not blogging, cooking, cleaning or otherwise catering to the needs of my 4 little persons, you’ll find me binge watching Billions. #goals

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