Q: I love formulas! What percentage of my income should I be spending on housing, saving for retirement, putting into an emergency fund, etc.? How much is a fair amount to set aside for vacations and fun stuff?
A: What a great question! This is one of the most frequently asked questions in the world of personal financial management. Without a doubt, it’s really important that families plan their budgets so that they can accomplish all their goals. Of course, it’s natural to think that there must be some “rules” to make the process easier.
The fact is there are no ironclad rules for how much a family should spend on the various categories in their budgets. Coming up with percentages is problematic because there are too many variables that affect a family’s budget, such as location, income level and family size. For example, the cost of living is very different in Southern California than it is in Puget Sound. Housing, transportation, food and all the other expenditures will be different.
This is not to say you shouldn’t develop a strategy based on your family’s unique situation. Here is an action plan that will satisfy both your desire to put some percentages on certain monthly expenditures, and also help you save money for those “extras” such as vacations and other fun activities.
- Sit down and put together your income and expenditure information using personal finance software such as Quicken or MS Money, or use a simple spreadsheet.
- Start tracking all your expenses and enter them into your worksheet. At the end of the month, examine the numbers and see what your “bottom line” is. If you’re deficit-spending, you’ll need to figure out where all your money is going.
- After a month or two of tracking your income and expenditures in this fashion, you should be able to calculate what percentages of your budget you’re spending on housing, food, clothing, etc. You may discover that you’re overspending on a particular category such as transportation or eating out. It’s at this point you can begin to brainstorm ways to start saving money.
Here’s one timeless financial goal that you should try to achieve: You should try to “pay yourself first,” i.e. put a certain percentage of your income into savings BEFORE you pay your bills. This practice will encourage discipline around the rest of your spending. You’ll automatically adjust your spending to accommodate the money you’re putting away to reach your goals.
By the way, even in ancient times, it was considered wise to pay yourself 10% of your income. If you can’t do 10%, start with a smaller percentage. As you become more disciplined, you’ll be able to save more.
Ultimately, as you get better at understanding where your money goes each month and once you’re able to habitually put money away into a savings account, you can then make more educated decisions about how you allocate your savings.
Additional resources for managing family finances:
- Money Management Tools for Families
- Tips for Creating a Family Budget
- M Is for Money Management
- Boosting Your Child's 'MQ': Talking to Kids About Money
- Money Matters: Reducing Financial Conflict for Parents
Have questions about family finances? Email them to email@example.com and Verity will address them in upcoming columns.