Do you think your spending is out of control? Or are you a frugalista who only spends the bare minimum but needs some direction on telling your money where to go? How does your budget (or lack thereof?) compare to your neighbor’s budget?
These common budgeting questions can be answered by creating your dream budget.
I recently shared the three basic things that should be in your dream budget: your income, expenses, and financial goals. Let’s break that down even further and start creating your dream budget – one that helps you reach your financial goals.
How average Americans spend their money versus how financial advisors recommend they spend their money
The chart below shows how the average American (according to the U.S. Bureau of Labor Statistics) spends money, compared to recommendations from Dave Ramsey, a financial advisor.
| Category |
Percent of Overall Spending |
Recommended Percentage |
| Housing |
24% |
25-35% |
| Utilities |
8% |
5-10% |
| Food |
14% |
5-15% |
| Clothing |
4% |
2-7% |
| Medical |
6% |
5-10% |
| Donations |
4% |
5-15% |
| Savings/Insurance |
9% |
5-10% |
| Entertainment |
5% |
5-9% |
| Transportation |
14% |
10-15% |
| Personal/Debt/Misc. |
12% |
5-10% |
For the most part, Americans keep their spending within the recommended percentages. Note that this is an average, though. It may be higher or lower based on location. For example, housing tends to cost more in metropolitan areas like New York City or Los Angeles.
What are your expenses?
To create your budget, make a list of your monthly income, expenses (if you need help figuring out how to track your expenses, refer to this post), and goals in this order:
- Your income
- Primary expenses, like the following:
- rent/mortgage payments and insurance
- utilities (water, electricity, fuel – gas, propane, etc.)
- groceries
- transportation costs (car payment, car insurance, fuel, taxes, license fees)
- Debt
- student loan payments
- credit cards that you need to pay down
- Savings goals
- rainy day fund
- household fund
- retirement accounts
- college savings funds for your kids
- Secondary expenses
- clothing
- dining out
- entertainment
- cable TV
When I create my budget, I create a budget for the entire year, but I break it down by month. Remember that each month may be different. For example, I typically pay my property taxes in September and December, and I contribute to my kids’ college savings funds on their birthdays and Christmas.
If you struggle to save for one-time expenses, like property taxes, try saving a little each month. In years past, I included those expenses as a monthly expense and put the money in a savings account each month. When my taxes were due, I was able to easily pay them by withdrawing the funds from the savings account.
For our purposes, start by creating a monthly budget with your typical expenses. After you create your basic monthly budget, print out additional copies of the budget template and use it to create your budget for every month, including unusual expenses.
Remember to tweak your budget for fluctuations, like higher heating expenses in the winter or higher electricity expenses in the summer.
How do you want to spend your money?
Expenses can change depending on your lifestyle and income level. For example, a single grocery store cashier with eight kids could expect to spend a higher percentage of her income on groceries and housing. On the other hand, a married but childless CEO might spend a higher percentage of her income on entertainment than groceries.
Tailor your budget to your needs. Try to stay within the recommended range (or better). However, depending on your circumstances, your budget may look slightly different.
You may not have a rainy day fund, so you’ll want to save at least $1,000 in case of an emergency. It’s important to have a small savings account before worrying about making extra loan payments. If you already have more than $1,000 saved in an easily accessible rainy day fund, focus on paying off your highest interest debt, and then start saving in your other accounts.
Also, focus on your most important expenses first. You have to eat every month, but it makes more sense to buy groceries than dine out, so groceries are listed as a “primary expense.”
For people who already have a rainy day fund established, debt is listed above saving. The goal is to pay off all of your debt (from highest interest to lowest interest) first, and then use that money to build your savings.
Even so, make sure that you’re not neglecting your savings accounts. You should still make small contributions to your savings accounts (especially your retirement accounts) as you pay off debt.
By breaking your expenses down into a workable order and comparing them to recommended percentages, you’ll have a better understanding of your budget and your overall financial standing. You can start by paying your most important bills, then pay off your debt, then pay yourself, and then have some spending money.
Your budget isn’t set in stone. As you use your new budget, play with the numbers. Challenge yourself to spend less in a different category each month and use the extra savings to work toward your financial goals. You may get there sooner than you thought!
Let’s start working your way to reaching your financial goals!
For more information on starting or updating your budget, check out the posts in this series:
- Why you need a budget
- What you should include in your budget
- How to create a budget framework
- Which programs and tools would be best to create your dream budget
- What to do when your budget doesn’t work.
Join me on a journey as we create your dream budget!