It seems most people are unaware of basic budgeting techniques. When these guidelines are followed, they can help individuals create a good system for making financial decisions and build financial stability.
There are two types of spending categories: non-discretionary (you cannot change or control, these are financial commitments and required living expenses) and discretionary (you can control and are not required for living). The discretionary category is usually what gets people into trouble with overspending; but housing — as a non-discretionary category — has had its fair share of overconsumption in recent years as people may not have been aware of how much they could comfortably borrow. A good rule of thumb is for your housing payments to not exceed 25 percent of your income, and your mortgage and other debt payments to not exceed 36 percent of your income.
It may be worth noting that the younger generation has not been able to establish the same financial systems as prior generations, mainly due to student loan debt; so a category specifically for debt has been included in this type of spending plan.
| Non-discretionary | Recommended Percentage of Income |
| Debt payments | 10% |
| Housing (rent/mortgage, insurance, utilities) | 25% |
| Food (groceries, dining out) | 10% |
| Health insurance, co-pays | 5-10% |
| Savings (for short-term goals such as buying a home and long-term goals such as retirement) | 10% |
| Taxes (Social Security, Medicare and federal/state) | 7.65-42% |
| Discretionary | Recommended Percentage of Income |
| Clothing | 5% |
| Transportation (car loan/lease, gas, insurance, public transportation) | 10% |
| Charity | 5-10% |
| Entertainment/vacation | 5-10% |
For Example:
| Salary | $40,000 |
| Less FICA/Medicare 7.65% | ($3,060) |
| Less single person taxation 25% | ($10,000) |
| Net take home | $26,940 (roughly $2245 per month) |
| Debt payments | 10% | $224 |
| Housing | 25% | $561 |
| Food | 10% | $225 |
| Health insurance/co-pays | 10% | $225 |
| Savings | 10% | $225 *Note: contributions to a pre-tax savings program like a 401(k) will decrease your taxes |
| Transportation | 15% | $336 |
| Charity | 10% | $225 *Note: charitable contributions may be tax deductible |
| Clothing | 5% | $112 |
| Entertainment/vacations | 5% | $112 |
Other financial programs that may be appropriate, such as life and disability insurance, would also need to be accommodated into one’s budget.
Making decisions that will help you manage your financial resources in both the short- and long-term will go a long way in helping you create financial security.
FPA member Amy Jo Lauber, CFP®, is President of Lauber Financial Planning in West Seneca, NY.
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