How Much Should You Budget for
Each Major Expense in Your Life?
by www.SixWise.com
Most Americans (65 percent) believe they are very or highly
knowledgeable when it comes to personal finances, according
to a 2005 "American Financial IQ" survey. However,
more than one-third (36 percent) of the U.S. population does
not use a budget to manage expenses -- a crucial tool to keep
your finances in check, according to experts.
Only about 32.5 percent of Americans follow a budget
AND track their spending to make sure they're staying
within their financial limits.
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Further, of those who do maintain a budget, only 32.5 percent
keep it for a time period long enough to track their spending
(nearly 30 percent modify their budgets as often as once a
week, which makes it difficult to see where your money is
going).
Why Create a Budget?
A budget allows you to see where your money is being spent,
how much you are spending and how much you have leftover to
save. Only by creating a budget will you be able to determine
if you can really afford your daily latte or coveted convertible,
or if you're better off allocating that money someplace else.
Along with keeping track of your finances, a budget allows
you to plan for short- and long-term goals. With a budget,
you can figure out how to save for your vacation in one year,
a bigger house in five years or your retirement in 20 years;
it's all there in black and white so there will be no surprises
later on.
"Most people don't budget properly because they're not
taught to," says Howard Dvorkin, president of Consolidated
Credit Counseling Services in Fort Lauderdale, Fla. "There
are no courses I know of, especially in the high school level.
A lot of families purposely don't talk about finances; I think
that's extremely detrimental."
Budget-Making Basics
Creating a budget is a simple, albeit tedious, process. It
involves comparing your total income to your total expenditures
(broken down into fixed expenditures like mortgage and car
payments and flexible expenditures like entertainment).
You can do this on paper, use a computer program or use an
online calculator, like this
one at CNNMoney.com. If you find that the thought of creating
a budget is just too overwhelming, consider calling it a "spending
plan."
Are you saving enough for a rainy day? Experts recommend
spending no more than 90 percent of your total income,
and stashing away the other 10 percent.
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"The word 'budget' says self-deprivation," says
Deborah Knuckey, a money coach and author. "The way I
approach, I talk about creating a spending plan and start
from, 'What do I want to make room for?' Start with what you'd
really like to spend and how you can create that space. It's
not about being frugal. It's about saying, 'What's most important
to me and how do I get there?' "
In other words, once you've established what your spending
is, you need to figure out what it should be to help you achieve
your goals.
How Much Should You be Spending on Major Expenses?
Experts say you should spend no more than 90 percent of your
total income, leaving 10 percent for savings and emergencies.
Broken down further into each major expenditure category,
here is what percentage of your total income the experts say
you should be spending, compared to what the average American
is spending (based on 2004 data from the Bureau of Labor Statistics).
Major Expenditures |
What Experts Say
You Should Spend ... |
What the Average
American Spends ... |
Housing |
30% |
32.1% |
Insurance
Auto, health, life, homeowner, etc. |
4% |
0.9% |
Savings and Investments |
15% |
13.4%
including pensions and social security |
Taxes |
25% |
N/A |
Living Expenses
Food, clothing, entertainment, health
care, education, hobbies, fuel, utilities, personal
care products, day care, etc. |
26% |
53.6% |
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The Final Step: Tracking, and Adjusting, Your Spending
If your budget tells you that you are spending more than
you earn, you need to make adjustments, fast. Continuing to
spend more than you earn (which many families who earn $50,000
or less are doing each year, according to the Labor Department)
is a surefire way to engross yourself in debt and financial
hot water.
The first thing to do would be to eliminate any unnecessary
spending on personal items, entertainment or other luxuries
you can live without. Even if you aren't spending more than
you earn, though, if you notice areas where your spending
seems high, you may still want to make adjustments to free
up money for other purposes, like saving for retirement, vacation
or other things that are important to you.
Finally, you must keep track of your spending indefinitely
to make sure it's in-line with the personal budget you've
created.
"Tracking every nickel is a big process and a lot of
people don't do it. You can make the best budget, but if you
don't track it, what good does it do?" Dvorkin says.
"In my house, every month, we compare the actual to the
budget. It's not fun. My wife hates me for it. But you have
to track what you're spending."
While watching where your cash is going, experts agree that
there are three major rules to keep in mind: live within your
means, pay
yourself first (plan for your retirement), and adjust
your financial priorities based on your own goals and values.
Recommended Reading
401(k)s:
8 Key Tactics You Need to Know to Get Full Benefit from Your
401(k)
Reverse
Mortgages: What Exactly Are They, Who Are They Best For?
Sources
Consumer
Action
U.S.
Department of Labor, Bureau of Labor Statistics
Bankrate.com
CNNMoney.com