What percentage of my income should I spend on fill-in-the-blank? This question often comes up when we have a life event such as a change in pay, the desire to make a large purchase, having a baby, or we simply want to get our finances in order.
There are basic guidelines for what you should spend in twelve categories such as housing, food, transportation, entertainment. However, it really depends on your net income and your goals. For example, it’s best to pay off high interest credit card debt before building your emergency fund. Once you are out of debt, that money should go toward building your emergency fund. And so on.
So what are the percentages? Start with your monthly net income, and follow these basic guidelines:
Saving and Retirement: 15%
Housing: 25% (some say 25%-35%)
Utilities: 9%
Food: 9%
Transportation: 9%
Clothes: 5%
Medical and Health: 6%
Entertainment: 7%
Personal: 5%
Insurance: 5%
Tithing and Charity: 5%
Debt: 0%
In this example, there is no debt. But if you have it, take from another category until it’s gone. Also, you will see 25% of this person’s net income is going toward housing. At $50,000/year, their monthly net income is roughly $37,500, of which $781/month goes to housing. That’s not very much if you live in New York City, but it may be more than enough if you live in a small, rural town. On the same token, if you have a fuel-efficient car and no car payment, you can take from that category and put more toward housing, entertainment, etc.
Finally, if your income is greater than $90,000/year for example, you likely will not need to devote 9% of your net income to food, which would roughly be $470/month. So you can take from “food” for saving, transportation, etc. Or, if your income is less than $25,000/year, you may have to skip the car and ride the bus, allowing you to allocate more of your net income to food, utilities, etc.
A solid spending plan changes over time as you reach your goals. The fun starts once you are out of debt, have an emergency fund, and are on track with retirement, because now the income that was going toward those things is freed up so you can put it to other uses such as travel, investments, and more!
