One of the most difficult obstacles in setting a budget is understanding how much is needed for each category. Is $500 enough for groceries or should it be $1,000? How do I know if I'm being extravagant when it comes to entertainment? Am I saving enough?
The same difficulty comes up when it's time to negotiate your salary or ask for a raise. If we don't know how much money everyone else is making, it's difficult to ask for a fair amount. No one wants to leave money on the table because they asked for less than the boss would have agreed to, but there's a little voice in the back of our heads that makes us uncomfortable with asking for too much.
That little voice is part of the problem, of course. It's what keeps us from asking the neighbors how they managed to save up enough to buy the house. It's what keeps us from being willing to admit our budget isn't where we'd like it to be. Our overall discomfort with discussing money, which lies in stark contrast to our willingness to show off our money, can be an incredibly large problem.
In hopes of helping you live within your means, understanding where you're being frugal and where you're being extravagant, 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. As a reminder for those who haven't taken algebra since high school, most of these statistics use the median figure, which is the number at which 50% of Americans would be above the number and 50% would be below. That number is more accurate than the mean or average, simply because the ultra-wealthy distort the mean, in spite of making up a very small proportion of the population.
Question: How much do Americans make?
Answer: The typical household income is just shy of $54,000. That number comes from the U.S. Census Bureau, which is reliable, but its reliability comes slowly: it's a 2014 stat. Still, our income is up one percent from 2013, and another 1 percent would put us at right about $60,000. After a few years of sub-one percent income growth in the middle class, every little bit helps.
Question: How much money does the typical American have saved? Does age affect our savings?
Answer: It really does. Young people have the least saved, with 51% of Americans under 35 keeping 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. The savings outlook gets rosier as Americans get older, though, with positive savings rates among every other adult age-related demographic. Americans between the ages of 35 and 44 years old save at nearly a 3% rate, 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 less than 30 days of emergency savings, while 47% said they had less than 90 days.
Financial planners typically recommend households keep at least six months of emergency savings on hand, although some analysts suggest household savings should be equal to a year's income. Six months of median income would be $27,000.
Question: So, how do we spend our money?
Answer: 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, which has a ripple effect throughout the economy. It makes homeownership crucial, because getting back equity on part of that huge slice is the first step to financial security. It also causes all sorts of geographic problems: 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. Since everyone needs a place to live, employers have to pay employees more in expensive cities, driving up the prices of goods and services across the board and raising everyone's cost of living. Thus, lower-income individuals are pushed farther and farther from city centers, lengthening commutes, increasing transportation costs and generating CO2.
Transportation costs about $10,000 per year, the second most expensive budget category, while food costs of around $7,000 come in third. Both of these categories will be cheaper in next year's numbers because fuel prices are so intimately tied into both. Still, if you're looking to clean up your budget, the 30% or so that typical families spend on cars, gas, groceries, and eating out is probably the quickest way to trim fat.
Personal insurance and health costs take up another $9,000 per year, so your health care and health insurance might cost more than your food. Eating healthier may reduce all of these costs for your family, although it's not clear how much less expensive eating healthy really is.
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 a new washer/dryer last year, for example, you're probably not in the market for a new one right now.
Hopefully, this article was enlightening and it can help you figure out how you've been spending your money as well as what adjustments you might make to save a little extra money. If you're looking to set up a more aggressive savings plan, let us know. We've got great programs and we're eager to help you out.