“Comparison is a thief of joy.”
– Theodore Roosevelt
Have you ever wanted to see how much money your neighbors spent on things? Not because you’re nosy, but just to make sure you are not making some big mistake that you can never recover from.
And, well…maybe you’re a little nosy. I’ll be the first to admit it!
Obviously managing personal debt is a huge problem in this country, so many people are clearly spending more than their income can support.
But how much, and on what? What if we all spoke freely about our income; about how much we spend each month; or about our charitable habits?
Well, I am not sure we will ever get to the point of sharing freely our deepest financial secrets, but an annual survey by the Bureau of Labor Statistics can give you a little insight on how you compare to your fellow Americans. I read the report and a discovered some interesting things that I wanted to share with you.
So how does the average American spend their money? Well, here’s the answer:
Those surveyed spent 33% of their income on housing. This includes mortgage or rent payments, upkeep, furniture and other things inside the home.
Is this good? Well, it’s pretty standard. Most housing experts—including the U.S. Government—recommend spending no more than 30% of you income on housing, else you could be considered ‘cost burdened’, meaning you have a hard time paying for other necessities like food and medical care.
The city and region you live in can also have a huge impact on your housing costs. If you’re located in places like Los Angeles, Miami or San Diego, housing expenses could account for 43% of your income or more!
Personally, I feel like 33% is still a large number, and perhaps too high. I can’t help but think that if someone is spending a third of their pay on their home, things must feel financially tight. It really doesn’t leave a lot of room for those unexpected things that will come up.
Don’t be house poor. Try to limit your overall housing costs to a lower 25% if possible.
Transportation was the second largest expense behind housing, at 16% of income.
A major component of this category is ‘Vehicle purchases’, meaning money spent on car notes and new vehicles. This is encouraging to me, because this category is almost totally within your control!
While I always recommend buying used, there are ways to negotiate with car dealers to avoid paying more than you absolutely have to. The type of car you drive and the amount you spend on it is up to you.
Other parts of this category—like fuel costs and auto insurance—can be reduced if you shop around, but for many of us these costs are somewhat fixed, and the best we can do is try to minimize them.
Oh yeah, and no more paying for a car wash every weekend! Try washing it yourself every now and then. It is a great way to keep tabs on the condition of your vehicle.
As a side note, the transportation category growing the fastest year over year is ‘Public and other transportation’. As ridesharing apps and driverless cars become more and more prevalent, I can’t help but wonder if this category will one day take over all the rest.
3. Health care
And it’s only getting more expensive.
This category averaged 8% of income. Health care costs for the bottom quartile of income earners rose 15.6% from 2016 to 2017, and rose 6.75% on average for all other quartiles during that same period.
Anyone that needs to budget more than 10% of their income for healthcare may find themselves having to cut back on something else. What is scary is that some are putting off doctor’s visits to save money.
Please don’t do this. Look at cutting back on other expenses before skipping your physicals!
Unfortunately, health care costs don’t go away in retirement; in fact, you may spend as much on health care during retirement as you did in all your years leading up to it.
So with all this doom and gloom, what can we do to keep health care from busting our budgets? Luckily there are strategies out there—like utilizing a Health Savings Account, if your employer offers one—that can help give you an edge.
Food is not cheap…but going out to eat is more expensive than eating at home.
The average ‘Food at home’ expense was $4,363, while the average ‘Food away from home’ was $3,365. If you want to cut your food bill, try eating out fewer times per week.
Make eating out special. One night out on the weekend, and maybe a bonus after a hard day during the week.
Once you’ve changed your habits, don’t leave your leftover cash sitting around in a checking account! Reallocate it to a savings account, brokerage, or retirement savings plan. The more you can automate, the more likely you are to stick with hard-earned habits like these.
5. Everything Else
The top four categories make up approximately 70% of income spent every year. But what about the other 30%?
There are several smaller, miscellaneous categories that make up the remaining balance. Paying into Social Security and/or a pension plan is a big one, and so is Entertainment, Education, and Apparel / services.
But there are also categories that I was disappointed to find are lower than I expected. One is Cash contributions, which accounts for money given to people and organizations outside the household.
I have always said that you should consider giving away 10% of what you make, but people just don’t give away that much money. Cash contributions averaged only 3%, and even saw a 10% drop between 2016 and 2017.
Giving doesn’t have to hurt. There are plenty of ways to make giving fun and easy, and honestly, I’ve always found that giving to those who need it helps my reset my perspective on life. Plus, you might also find that the more you give, the better you end up doing financially. It’s a pretty cool phenomenon!
“Too many people spend money they earned to buy things they don’t want to impress people that they don’t like.”
– Will Rogers
So how do you stack up?
If you feel that you are not where you should be, start with some basics. Create a budget, automate your savings, and track your expenses. The act of thinking and focusing on your finances can lead to changes that will make big differences for you and your family!
CLICK HERE to become an Insider! Join my Email Insider Group to receive weekly tips and tricks on finance, education, home buying, insurance, Social Security and everything in between. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.
© Byron Ellis