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Personal Finance Basics: Where to Start?

on 5/23/2018

Young girl creating a personal budgetHas money management been one of those things you have told yourself you will focus on someday?  If you are serious about finally getting started on managing your money, a budget is a great place to start. How do you do that?

You start out with your income.
That was easy.  You probably only have one source of income – your job.


Then you start to think about where your income goes.
You start to list your monthly bills. You want to save more money.  And you know you need some pocket cash for discretionary spending.

Knowing how to make a budget is just half the battle.  Very quickly, you start to ask questions.  Are you spending too much on groceries?  How much should your car and transportation costs be?   

One of the most difficult obstacles to setting a budget is understanding how much you need for each category. 

  • Is $500 enough for groceries or should it be $1,000? 
  • How do you know if you're extravagant when it comes to entertainment?
  • Are you saving enough?

In hopes of helping you understand where you’re being frugal, where you may be spending extravagantly, and figuring out what it will take to save for a house, retirement, or college fund, let’s take a look at how the typical American household makes and spends its money. 

The numbers shown will be “median" figures.  Just a reminder, that’s the number at which half of the population would be above the number and half would be below.  That number is more accurate than the mean or average because the ultra-wealthy distort the mean, in spite of making up a tiny proportion of the population.

How much do Americans make?

According to the latest data provided by the U.S. Census Bureau, median household income was $67,521 in 2020

Median household income can vary pretty significantly by region.  Here is a selection of states and their reported 2020 median household income.

California                               $77,358
Florida                                   $57,435
Illinois                                    $73,753
Louisiana                               $50,935
Michigan                                $63,829
Minnesota                              $78,461
New York                               $68,304
Pennsylvania                         $70,117
Texas                                     $68,093

With this number in hand, you can determine where you fall compared to the average U.S. household and use that to judge how your spending and saving habits compare.

How much money does the typical American have saved? And how much should I have saved?

Age, marital status, and children have a large influence on the answer to this question.  As you might expect, young people have less saved than older Americans. 

60% of Americans under 35 have less than $1,000 in savings.  

In 2019, it was reported that, on average, single people age 34 and younger with children have $1,350 saved compared to an average of $2,729 compared to people in the same age range without children. On the other hand, single people between the ages of 55 and 64 who have children have an average savings of $6,911. 

While the amount you need in savings is highly personal, and specific dollar amounts can be arbitrary, there is a simple formula you can follow to help you figure out if you're setting aside enough money.

Starting to save early is important.  In your 20’s aim to save 25% of your overall gross pay. That 25% can be the combination of 401(k) withholdings, matching funds from your employer and any cash savings accounts or other retirement savings accounts that you have. The key here is to make sure your lifestyle expenses don't exceed 75% of your gross income.

  • By age 30, shoot for saving the equivalent of your annual salary. If you earn $40,000 a year, aim to have $40,000 in savings when you hit 30. Again, this includes any retirement account contributions, matching funds from your company, cash savings, or money you have invested elsewhere.
  • By age 35: Have twice your annual salary saved.
  • By age 40: Have three times your annual salary saved.
  • By age 45: Have four times your annual salary saved.
  • By age 50: Have five times your annual salary saved.
  • By age 55: Have six times your annual salary saved.
  • By age 60: Have seven times your annual salary saved.
  • By age 65: Have eight times your annual salary saved.

Financial experts typically recommend keeping, at least, six months of emergency savings on hand. 

  • Six months of U.S. household median income would be $33,760.

How does the typical American household spend their money?

  • The biggest chunk of the typical American budget goes to housing, at nearly $19,000 per year.  That’s about one-third of our paychecks. 

Homeownership is crucial to many households' long-term financial plans.  Building up equity in your home is often the first step to financial security.  “Equity” is the value of your house less any amount you owe on the loan ("mortgage") you obtain to purchase your home.  The largest asset that a household owns is often their residence.

Just as median income can vary greatly by state, housing costs are wildly different throughout the U.S. 

A family needs an income over $150,000 per year to buy a home in Los Angeles, but only $48,000 to afford a home in Orlando.  Higher earnings may offset the increased housing expense, but home affordability can still be a huge problem for those in lower income careers living in high-cost areas.

  • Transportation is the second most expensive budget category in the typical household budget, totaling about $10,000 per year.  Food costs of around $7,000 come in third.  If you’re looking to trim some fat from your budget, the 30% or so that typical families spend on cars, gas, groceries, and eating out is probably a good place to start. 
  • Personal insurance and health costs can be a big wild card in your budget.  On average, they take up another $9,000 per year for the typical U.S. household.  Employer provided health and insurance benefits can make a big difference in a household budget. 

The rest of our spending is discretionary spending, split into three roughly equal categories: entertainment, clothes, and everything else. 
These numbers vary considerably from family to family and year-to-year.  If you bought new kitchen appliances last year, for example, you’re probably not in the market for more right now.

This information can help you get a very general idea of how your budget compares to the typical U.S. household.  But every individual’s situation is unique.  Don’t be put off if your numbers vary from the norm.

Genisys Credit Union offers many tools to help you develop and maintain your budget. 

  • GreenPath Financial Wellness is a free financial counseling service for all Genisys members.  They can help you learn how to make a budget.
  • Genisys Online Banking includes a personal financial management tool to help you track your expenses.
  • Learn about the variety of savings products and Genisys Investment Services we offer to help you build wealth.

Take the time to study your spending habits, make modifications, and develop a plan to grow savings.  You will benefit now and in the future. 

 © Genisys Credit Union and, 2018.  Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and with appropriate and specific direction to the original content.




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