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A Guide to Creating Your Ideal Household Budget
March 28, 2018
The beginning of summer is the perfect time to take a look at your household budget. That might sound ridiculous if you’re focused on basking in the sun, but considering all the spending your household will likely endure over the next few months, including summer travel, summer camp for kids, barbecuing, back-to-school supplies and the like, it’s a good time to take out the calculator and look at how you're doing. Really, it's always a good time to budget.
But it's never easy. So if you'd like some pointers, here are some areas experts say you should be paying special attention to as you're looking over your budget.
Your home. Most experts suggest keeping your housing costs including mortgage or rent as well as homeowners insurance and taxes, to no more than 30 percent of your budget, and many suggest 25 percent.
But if you include everything you need to run the house, from utilities to kitchen cleaning products, the Bureau of Labor Statistics' Consumer Expenditure Survey suggests you might want to break up the housing portion of your budget this way:
Mortgage: 58 percent
Utilities: 21 percent
Household furnishings and equipment: 9.2 percent
Household operations (like a maid or lawn service): 6.8 percent
Housekeeping supplies: 3.6 percent
"Utilities are particularly unique because they're generally variable costs where you're never sure what you're going to pay every month," says Michael Levenson, a former analyst at JPMorgan who now owns Present Value, a gift registry for people who want to contribute money to a couple's life events, like a down payment for a home.
Levenson recommends couples create a spreadsheet and track their utility costs. "Pretty quickly, you can start to see fluctuations and patterns, so you can start asking yourself, ‘Why am I paying so much for electric in any given month?’ And then you can hopefully start changing your energy habits to bring those costs down," he says.
Transportation costs. This isn't just your car payment, but your gas and repairs, too.
"Cars are an interesting topic when speaking with clients. Some are car people, some are status people, some don’t or do drive too much and some people just don’t care," says Robert Mascia, a certified financial planner at Green Ridge Group in Bridgewater, New Jersey. For those in the market for a car, he advises: “Be prudent and don't spend more on a year's payments than you make in a month after taxes. So if you make $6,000 a month, don't pay more than $500 per month [in car-related expenses]."
If you do spend more than Mascia's recommend 8 percent, don't beat yourself up. According to the BLS, most Americans spend about 17 percent of their income on transportation.
Food. The general consensus seems to be that it's acceptable to allocate 5 to 15 percent of your budget to food. But according to the BLS, food accounts for 12.9 percent of the average U.S. household budget. Let's put it this way: If you number-crunch and realize you're spending 30 percent of your income on food, put the food portion of your budget on a diet.
Unexpected costs. It seems like there are endless things to budget for, since after housing, utilities, transportation and food, you likely need to budget for health care, debt, insurance, clothing and entertainment. But it's the unplanned costs that trip up many people.
As ReKeithen Miller, a certified financial planner with Palisades Hudson Financial Group in Atlanta, says, "It's easy to budget for your utility bill because if you don’t pay it, your lights will be shut off. But think about the issues you could face if you need to make repairs to your car but didn’t have the money to do so."
So how do you plan for the unplanned? Levenson says the key is whittling down your budget so you aren't living paycheck to paycheck and you constantly have a little left over. "Twenty percent would be great, but even if it's just 5 percent, that would help, knowing that you have X amount of dollars extra to spend a month if you need to replace your coffee table or buy some unexpected, random household item," he says.
Also consider that many unexpected costs aren't unexpected – we just don't budget for them. "News flash: Christmas is Dec. 25 this year," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. She says the holidays can trigger a financial tsunami that can put household budgets in a tailspin if consumers don’t plan for them throughout the year. "Same thing with back-to-school expenses, car tags, traveling for your child's sporting events ... Those types of expenses are predictable and we're able to plan for them, but so often don't work them into a budget due to them not occurring monthly."
Mascia echoes that sentiment. "The one thing people don't do well is budget, period. They commingle their funds. Their emergency funds, vacation funds, expenses and so on [go] into one or two accounts. They have no set amount for each goal," he says. "The first thing I stress to my clients when we start planning is to budget and set up multiple accounts. Then prioritize. This way, if your vacation fund is $3,000 per year and you use $3,000, you know you have to replenish those funds before you go on vacation next year."
It's not easy. For many people, something always seems to come up that rattles the budget, such as an unexpected car repair or a slew of hospital copays. This is why Cunningham, who also advises putting money aside for expenses you know are coming later in the year, says, "The trick, however, is not to spend the money allocated for any of these irregular expenses before they come along."