The Rule-Of-Thumb Personal Budget: 4-6-10-25-33

I always hear numbers thrown out about what you SHOULD be spending on various things. "1/3 of your income on housing." "$10 a day on food." But none of these systems are really comprehensive in guiding you for a budget. Wouldn't it be nice to know how you are doing compared to everyone else? Are you spending too much on your house? Did you buy a car that is more money than you can really handle? How much should you really be spending on clothes?

The US government puts out a lot of statistical reports on all sorts of things. I found one in particular that seems like it should be pretty useful for this purpose:

Consumer Expenditures in 2005
U.S. Department of Labor
U.S. Bureau of Labor Statistics
Report 998
February 2005
It contains all sorts of data. What I was really interested in was the average percentages of expenditures of most consumers.

In 2005, the average consumer unit has 2.5 people. It made $58,712 with 1.3 wage earners ($45,163 per wage earner). It spent $46,409 on a variety of things. The average top 6 as a percentage of expenditures over the four years of data were:

Housing: 32.60%
Transportation: 18.55%
Food: 13.10%
Healthcare: 5.83%
Entertainment: 5.08%
Apparel and services: 4.15%

Which is still a little confusing, since you have to know what percentage your expenditures are of income, and does that include taxes? So to make it even simpler, here are some rules of thumb using your PRETAX income. Everyone should know what they make a year, right? Well, here you go:

Housing: 26% or about ONE QUARTER. This includes utilities, maintenance, mortgage, rent, etc.

Transportation: 15% or about ONE SIXTH. This includes maintenance, the cost of the vehicle, gas, etc.

Food: 10% or about ONE TENTH. This includes eating out and food made at home.

I'm going to skip healthcare, because that varies based on age/location and health.

Entertainment: 4% or ONE TWENTY-FIFTH

Clothes: 3% or ONE THIRTY-THIRD

So there you have it. A very basic rule of thumb for how much you SHOULD be spending if you want to be average.

1/4 on housing
1/6 on transportation
1/10 on food
1/25 on entertainment
1/33 on clothes

Applied Example #1:

Your household income is $50,000 per year. Here's what you should be spending (year/month):

Housing: $12,500 year / $1041 month
Transportation: $8,333 year / $694 month
Food: $5,000 year / $417 month
Entertainment: $2,000 year / $167 month
Clothes: $1515 year / $126 month

An interesting way to look at transportation is to use True Cost To Own. For my Subaru Impreza, it's $0.52 per mile. $0.58 x 12,000 for a year is $6,960. Using the rule of thumb of 1/6, you reasonably need to make $41,760 to afford that vehicle. At least, on the average definition of "afford" over all consumers.

Applied Example #2

Your household income is $24,000 a year.

Housing: $6,000.00 year / $500.00 month
Transportation: $4,000.00 year / $333.33 month
Food: $2,400.00 year / $200.00 month
Entertainment: $960.00 year / $80.00 month
Clothes: $727.27 year / $60.61 month

How much can you afford per mile for your car? $4000 / 12,000 = 33.3 cents per mile.

How much can you spend a day on food? $200 / 30 = $6.67


Now obviously, these numbers don't add up to 100%. And it doesn't scale well to the high or low end of the income spectrum. But it gives you a general idea of what Joe average is spending, and it's a quick guide to start your own budget.