I have met very few clients who do not cringe when we talk about the dreaded “B” word, budgeting. For many, they would rather do anything else than attempt to understand or set a budget for themselves and their families. The standard advice from most financial planners when it comes to budgeting is to “spend less and save more”. But for most families this is easier said than done, no matter what their income level. And exactly what do we mean by “spend less”, less on what? Most people do not even know where their money goes never mind where to cut back.
Rather than budgeting, I think we need to reframe this exercise to one of developing a good spending plan.
The US Dept. of Labor did a 2010 survey to see where the average consumer spends their annual paycheck (Consumer Spending Survey ). According to their findings the average consumer spends the following:
- 34.4% - Housing
- 16.0% - Transportation
- 12.7% - Food
- 11.2% - Personal Insurance and Pensions
- 6.6% - Health Care
- 5.2% - Entertainment
- 3.5% - Apparel and services
- 3.4% - Cash
- 7.0% - Everything Else
While this information is interesting, it doesn’t really tell us if these figures are an appropriate “guideline” for every family. Although, it does give us a place to begin, the fact remains that each of us is unique and our situations all vary. The question therefore is what does a “balanced” household spending plan look like?
There is a direct relationship to the amount of income you bring in and a reasonable plan for spending your hard earned dollars. Most financial planners will tell you to make sure your “fixed expenses” are covered first. Fixed expenses can include housing, food, clothing, transportation, the necessities of living and working. For some of us that will be 100% of the income we bring in so the percentages above would change and some expenses would disappear all together.
For others, there may be money left over each month. If that is the case, you then need to look at what would happen if you got sick and couldn’t work or died unexpectedly. What would the financial impact be on your family? It may be appropriate to look into purchasing or increasing the amount of life and disability income insurance that you have. Many companies offer these as employee benefits at reduced cost so check with your employer to see what they offer. If your company does not provide these types of benefits, meet with an insurance agent and have them shop the market for policies that fit your needs and your spending plan.
Once you have covered your basic “fixed” expenses and provided some coverage for risk, you can then start to save. I put savings before any “extra” or additional spending as so many people skip this step entirely. So much so, that it doesn’t even show up on the Dept. of Labor’s survey results. However, it is one of the most critical steps in any good spending plan. Everyone should have a “rainy day” fund, or as financial planners like to call it “a cash reserve” account. This helps to pay for those unexpected expenses that pop up. It also helps to avoid using expensive credit cards or loans to pay for them.
Another component to savings is college and retirement. More and more of us are living longer and longer and the need for retirement savings is huge. The money you save today will go a long way in deciding when and how you can retire in the future. So if you have to decide about putting money into your 401(k) plan or into a college savings account, consider that there are programs to help with college funding, but retirement will fall squarely on your shoulders.
Everyone’s situation is different and many of you will have variations in your spending pattern. Some will have more to spend and some will only be able to cover the basics. The most important thing when developing your own “Spending Plan” is to fill in the big stuff first. And while the percentage numbers above may vary, they are a good place to start. Knowing where your money is going is a critical first step toward achieving your financial goals. Without this knowledge you are operating in the dark and are only guessing at what you need to do to reach your goals. Create and follow your own Spending Plan. It is not too late to start.
Jessie Foster is a registered representative of Lincoln Financial Advisors Corp.
Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding this information as it relates to your personal circumstances. Neither Lincoln Financial Advisors nor its representatives offer legal or tax advice.
By Jessie L. Foster