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Budget Guidelines for Determining How Much You Can Spend

by Gary Foreman


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Hi,
Do you have a guideline on how much should be spent for things? I rent an apartment and don't want to own. What percent or amount should my rent be, not including utilities, etc.? My rent is $675 per month. That includes heat, electricity, cable. When I had a previous apartment I used a maximum of $26 for electric, $60 for heat and $30 for cable. If I reduced my rent by the included items in this apartment, my rent would be $559. My income per month is $1,650. Is that too much rent to be paying on my salary?
Lynn

Lynn asks a very good question. She's learned that if you spend too much for one item in your budget there's not going to be enough left for something else. Let's begin by answering Lynn's specific question. Is $559 too much to be paying in rent when your income is $1,650? And the answer is yes, it's a little too much. How do we know? We compare her spending to some budget guidelines that have been developed based on other people's experience over the years.

For instance, the guideline I use is that not more than 33% of your after-tax income should be spent on housing. Using Lynn's figures that would mean she should limit her housing expense to $544.50 ($1650 x .33). She needs to remember that the housing expense includes everything that's involved in having a roof over her head. Electricity, phone, renter's insurance and anything else that she's responsible for should be included.

In Lynn's case she's spending $675 or 41% of her income. Technically, we probably should take the $30 for cable out of the rent and consider it entertainment. But, look at what's happening. Somewhere else in Lynn's budget she needs to find 8% of her income. That's $132 each month that needs to be saved to pay for her apartment.

Before we go any further, let's take a look at a chart that lists the categories and recommended percentages. Click on a category to discover ways to trim that area of your budget.

Housing 33%
Food 14%
Auto 14%
Insurance 5%
Debts and Savings 9%
Entertainment 5%
Clothing 5%
Medical 5%
Contributions and Misc. 10%

Back to Lynn and her problem. Where will she find that extra money? It's possible that she doesn't need a car and can cut her auto expense in half. Maybe she doesn't want to give to charities and can limit that category to 4-5% for miscellaneous items.

But unless one of those two things are true, she's going to have a hard time making her budget work. Why? Think about it. None of the other categories are big enough to provide a savings of 8%. Suppose she thought she could reduce her food expenses. But, is it reasonable to assume that suddenly you'll start spending less than half of what you do now for food? You might save 10% or even 20% of your grocery bill. But half?

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OK, some of you are thinking that this is just a guideline. And you're right. It's not a black-and-white situation. Maybe where you live it's not possible to keep your housing costs that low. So you'll need to make adjustments. But, as you can see, adjusting by more than a couple percent is really pretty difficult.

It could be that Lynn is a stay-at-home type person. Maybe entertainment or clothing isn't that important to her. Perhaps she has a great medical plan through her job and has very little medical expense. There's nothing wrong with taking that money and putting it where you'd get more enjoyment for your dollar.

That's the point. By taking a look at how she spends her money, Lynn is going to get the most enjoyment with the money she has available. Now she has the ability to choose an answer that will make her the happiest.

She won't be facing ever increasing credit card debts and the stress that brings. She won't be scratching to save a few pennies in every area of her life so that she can stay in an apartment that's beyond her income. By taking control of her finances Lynn will get the most bang for her buck. And that's just being a smart consumer.

Are you heading for debt trouble? This simple checklist can help you find out and provide options for doing something about it.

One final note. The guidelines we've used are for after-tax income. That's your income after you've paid taxes, but before other deductions for medical insurance or retirement plans have been deducted. You might need to take the statement that comes with your paycheck and do a little figuring to know what your after-tax income really is. In this case we've assumed that the $1,650 that Lynn mentioned was after-tax income.

So is it OK for Lynn to spend $675 for rent? Only she knows all the details of her spending. It's likely to be a struggle. Only she knows for sure. But, at least now she has some information to help guide her decision. Thanks to Lynn for asking an interesting question.

Updated December 2013


Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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