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.

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."

"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).

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