How Much Should Life Cost?

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One of the more frustrating aspects of “adulting” is managing money responsibly. Unlike when we were children, we pay for our mistakes with real-life consequences, instead of parent-ordered punishments. But even that’s not enough to keep the best of us from falling into financial turmoil.

This is why budgeting is so important. Despite the well-meaning intentions of the age-old money management strategy, many consumers have difficulty sticking to them; either because the tedious expense tracking wears them out or they’re unsure how much they should be spending on various needs and wants.

So, how can people manage their money better and feel good about doing so? It starts with understanding how much life should cost and working backward from there.

Housing & Utilities

Any person’s top two life needs are housing and food. It’s just that housing usually costs way more money. Of course, it all depends on the locale. For example, the median home value in San Francisco is $1.61 million whereas in Tulsa it’s $120,100. One doesn’t need to be an economist to know that these locations may warrant vastly different housing percentages in people’s budgets.

On the whole though, if you’re paying more than 35 percent (of your take-home pay) in housing, you should probably look for cheaper digs. Keep in mind that this 35 percent isn’t accounting for utilities. Generally, it’s recommended to keep utility services between five and 10 percent of gross income, but closer to five if your housing is closer to 35 percent of your monthly earnings.

Groceries

Humans can’t survive without food, so there’s no reason to feel bad about having a hearty monthly food bill. However, what we spend on food can quickly get obscured when we dine out too often or aren’t mindful enough with our grocery selections. According to the 50/30/20 rule, 50 percent of a household’s after-tax income should be allocated toward needs. So, taking the maximum 35 percent in housing costs leaves a maximum of 15 percent toward food, but that’s assuming housing and food are your only life needs. You’ll want to have that extra cushion for transportation, healthcare, and utilities.

Transportation

Unless we’re lucky enough to work at home in our pajamas, most of us have to go somewhere to earn our money and be contributing members in society. This requires transportation means. While transportation is a necessity in most cases, there’s more wiggle room in this expense category than housing and food. If you live in a large metropolis, consider taking public transportation or riding a bicycle to work. If you need a car to get to work, could you carpool with a coworker? Every additional measure you take means money saved that can used toward another spending category.

Healthcare

Navigating the healthcare system in the U.S. isn’t fun, particularly if you don’t have insurance. Should an uninsured individual experience a medical issue, they could be paralyzed in debt before they know it. This is why it’s important to get at least a bare-minimum insurance policy that protects against worst-case scenarios. Make sure to carve room between five and 10 percent of your monthly gross for healthcare costs. This category will fluctuate a lot among consumers, with age, medical history and family health history impacting insurance premiums and the likelihood that care will be needed.

Debt Repayments

If you’re one of the many U.S. households dealing with debt, do yourself a favor and be one of the few with a plan to get out of it. The 50/30/20 rule suggests that 20 percent of after-tax income be devoted to repaying debts as well as saving for an emergency fund and retirement. How a household divides this 20 percent will be dependent on how much debt they carry, and more crucially, the interest rates of those debts.

Savings & Retirement

Did you know that 34 percent of households experienced an unexpected expense over $1,000 last year? Worse, 25 percent of people say they have no emergency fund saved whatsoever. While the importance of an emergency fund shouldn’t supersede long-term savings initiatives, both are integral to healthy financial situations. Take the time now and create space for saving and retirement in your budget percentages.

As financial expert and thought leader Andrew Housser stresses in regards to creating positive economic outcomes, success doesn’t materialize out of thin air; it’s a product of sticking with a combination of short- and long-term incremental goals. How much should you allocate? Unless you’re dealing with a lot of debt, try saving at least 10-15 percent of your gross monthly income. If you’re relatively young, this will turn into a substantial sum come your golden years.

Leisure

We’ve arrived at the most discretionary spending categories that exist: entertainment, leisure, personal spending money — whatever one wants to call it. It’s clear that no exact answer holds true in this department, but a rule of thumb is to limit your ‘free” spending to no more than 10 percent of your income. If you’re dealing with a lot of debt, live in an area with a high cost of living, or have a bloated expense category elsewhere in your budget, use your leisure spending to balance your overall budget pie.

At the end of the day, every financial situation is different, just as every financial expert’s budget advice varies by percentage. Don’t worry so much about getting your spending categories refined to specific percentages when you’re starting out; that’ll come with time.

Instead, get a baseline for average spending per living category and track three-to-six months of expenses with a budget tool. At the same time, take your income, family size and your region’s cost of living into account as you structure your budgeting percentages. Together, these steps will lead to stronger financial discipline and a positive mental state that will contribute to long-term financial success.

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