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Budgeting 101 - Quick Tips to Get Started


on 2/18/2016

Woman cutting up credit card

You’ve decided it’s time to stop fooling around and to start getting serious about managing your money.  Your first step is making a plan, otherwise known as a budget.  Where do you start?

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?

You could ask your friends and family about their spending habits and for budgeting tips, but that’s a pretty awkward discussion to have.  Our discomfort with discussing money is often in stark contrast to our willingness to show off our money.

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 $53,046 in 2014.  In the time that has passed since that report, the number has likely grown to about $54,000. 

Median household income can vary pretty significantly by region.  Here is a selection of states and their reported 2014 median household income.

California                               $61,489
Florida                                   $47,212
Illinois                                     $57,166
Louisiana                               $44,991
Michigan                                $49,087
Minnesota                              $60,828
New York                                $58,687
Pennsylvania                          $53,115
Texas                                      $52,576

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?  

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


A little more than half of Americans under 35 have less than $1,000 in savings.  

  • Millennials have a negative savings rate of about 10%, meaning that for every $100 young people make, they spend $110 on average.  

Older Americans save more.  Americans between the ages of 35 and 44 years old save at nearly 3% of income, which doubles to nearly 6% for those between the ages of 45 and 54, and doubling again to 13% in the decade before retirement.

As for the total amount saved for a rainy day, the typical American household has around $6,000 in savings, around 12% of median household income.  Unfortunately, roughly one-third of all Americans reported that they had saved less than 30 days of emergency funds while 47% said they had less than 90 days.


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

  • Six months of U.S. household median income would be $27,000.


How does the typical American household spend their money?

  • The biggest chunk of the typical American budget goes to housing, at roughly $18,000 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.  Both of these categories are probably a little cheaper in 2015 and 2016 because of lower fuel prices.  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. 

  • Accel Money Management 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. 

 

Sources:
http://quickfacts.census.gov
http://money.cnn.com/interactive/news/economy/us-spending/
http://www.investopedia.com/financial-edge/1012/how-americans-spend-their-money.aspx
http://www.dailyfinance.com/2010/12/13/forbes-how-americans-spend-their-money/
http://www.fool.com/investing/general/2015/02/02/heres-how-much-the-typical-american-saved-last-yea.aspx
http://www.deptofnumbers.com/income/us/
http://www.usatoday.com/story/money/personalfinance/2015/03/31/millions-of-americans-have-no-money-saved/70680904/
http://finance.zacks.com/much-money-average-american-family-savings-7304.html

 

© Genisys Credit Union and www.genisyscu.org, 2016.  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 www.genisyscu.org with appropriate and specific direction to the original content.

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