The most common question that I get on a daily basis is this: How much money should I be spending on _______?
It’s a fair question. So here is the definitive answer in writing. Below you will find the ideal household budget.
But here is what you need to know. If you don’t spend the maximum amount in one category, then you can allocate more money to another category. In other words, let’s say that your household transportation costs are only 5% of your income, then you can feel comfortable to split the “extra” 10% towards other categories. That is exactly how I live the financial life that I want to live. I have very low transportation cost, therefore dining out and housing receive a higher allocation of my income. In addition, I don’t spend much on entertainment, therefore my allocation towards savings is above 10%.
People who fail to operate on this “give and take” basis often find themselves in debt. Many financial households operate on 110% of their income. You just can’t do that. I encourage you to compare your household expenditures to this chart and this philosophy. I would also love to hear your thoughts. Leave a comment on the blog in regards to your favorite trade-out. What one category do you scrimp on so that you can spend more on another?
And if you are a tither, then this budget is based your income after your tithe. In addition, this also excludes your 401(k) savings which usually is taken out of your income prior to it being considered “take-home” pay. Therefore if you save 15% of your gross income towards your 401(k) and another 10% of your take-home pay towards general savings, then you are a rockstar. Check that. A rockstar probably wouldn’t save any money.
The chart is based on take-home (net) pay.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
Just a suggestion. Might want to revise this using a different, more varied color scheme, for two reasons: 1) Even on the screen it seems like Housing and Entertainment (blue) and Medical and Transportation (green) are the same shade of the same color. 2) For those (like me) who want to print this out for future reference but don’t have access to a color printer, the color scheme is rendered almost ineffective anyway.
Nice guidelines! I’ve been allocating about the same for housing, savings and groceries/dining, but keeping everything else lower and putting 40% toward paying off my student loans. I’m on my way to being debt-free in a year! I’m just a little excited 🙂
The areas we cut down on are clothing and cars. We also could afford a substantially bigger home, but thankfully never fell into that trap.
What we like to do is travel, go out for dinner and give to others.
We like the setup and fortunately, the recent downturn in the economy did not affect us.
I’m going to vote to increase ‘charity’ to 7-10%. Otherwise, love it!
If someone chooses a private school for their children, where should that money come from? What areas do you recommend reducing in order to cover that expense?
I’d like to quibble with Medical. Healthcare costs are rising so fast, and with the advent of high deductible plans (which we have), this is hard to budget! Most people cannot shop around for services! It is a problem. Also, I assume this figure (5%) would not include premiums which are deducted from a paycheck…?
I noticed no income is alloted towards educatiln. Are you assuming that it’s FREE?
[…] As you can clearly see, you will have paid $343,739.01 to payoff a $200,000 loan. You would have paid the bank 72% more than you borrowed originally if you complete the entire mortgage. But in exchange for this large amount of interest that you will pay, you will have a relatively low monthly payment. As you will see in my next example, the low payment isn’t a product of anything other than “spreading out” your repayment over 30 years. And as I have suggested time and time again, you need to keep your mortgage payment around 25% of your take-home pay. […]
I am having trouble with the budget. How do you make a budget when you don’t work the same hours and your paychecks aren’t the same. And you get paid every two weeks. It seems like the system is set up for people who make more than 9.50 an hour and have a reliable paycheck.
hey miranda … im not expert but i can tell you what worked for me in the past…
I divide my bills into two equal parts … stuff I can pay on the first and stuff I can pay on the 15th … this way you know how much you need to make every two weeks to pay your bills … when i was a waitress I would always use my lowest amount that I normally got and wouldn’t spend my tips until I reached enough to cover the bills that were coming up… you’ll get her taken care of!!
[…] to Personal Finance Expert Peter Dunn, the maximum amount of your monthly income that should be dedicated to your mortgage payment is 25%. It is quite possible that if your mortgage payment ranges up to 30-35% of your income, you will […]
[…] At some point in your life, it just makes sense to know how much money you spend on a regular basis. When exactly is this time? Oh, I would say from 16 YEARS OLD on. Still buckin’ the trend, are ya? That’s okay. I believe that the Chinese have decided that 2012 is the Year of the Budget Pie-Chart. You NEED to know what percentage of your income goes to each spending category. You just have to. There’s no ifs ands, or buts. Here’s what I recommend, put your spending into a pie-chart at least 4 times per year. Start with the end of January, and then chart the month of April, August, and November. You are looking for trends and future problem areas. Below, you will find the ideal budget percentages. Here is the blog post on how to use this pie chart. […]
I am about to get married and we are working through our finances together right now. We are trying to figure out the best method for newlyweds when it comes to budgeting. Should we base these numbers like housing on one income on both of our incomes combined? Any advice?
Working on guide to address these very questions right now. I’ll post soon.
Thanks, I’m looking forward to it!
I think you have missed an important item, I would say the most important. And that is Children’s Education. How can you forget education, which is also a kind of investment for the future. Education, especially when it is not state sponsored, takes major part of your household budget. I am saying this from my personal experience. So kindly think about it. Otherwise, a good attempt.
Best
Dr. Rout, thanks for your thoughts. I created the budget to fit as many situations as possible. This means people without children or education expenses. The budget is meant to be a basic guide for those things we consume.
nice, I love keeping the housing as low as possible to have more to invest. Ours is about 8% of our income, it’s all about contemptment
Love the budget plan. Questions… I have a school loan, where does that go? I’m a tither, you ever thought about increasing the Charity section to 10%?
I love the graph!
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You have an excellent research on the above topic. The thing is that we should make our budget in such a way that, we can use our money efficiently in all categories. In case of car, it needed maintenance at a regular interval in order to function efficiently, and we should maintain it in a regular basis, as there may be problem arises if we didn’t maintain it in a regular manner which may cost us more. We could choose an affordable servicing center. But before it we should have done some research on the servicing center.