How Much Should I Spend?

Tuesday, January 11th, 2011

Regular readers of this blog know that I’m a strong believer in the use of a budget.  Once you start tracking your income and expenses, the next logical question is how much should I spend on food, fun, and all the rest.  That’s why I developed detailed recommended spending guidelines for one-, two-, three-, and four-person households across nine different annual household incomes.

Set Your Financial Priorities

You’ll see that I start with generosity, savings, debt elimination, and investing before getting to the spending categories.  One of the most important keys to wise money management has to do with setting financial priorities.  I’ve found that giving, saving, getting out of debt, and then investing a portion of your income before deciding how much to devote to cars and clothes and everything else is the way to go.  When people flip the equation and put lifestyle spending first, that usually leads to debt.  When spending comes first, people just seem to have a tougher time living within their means.

Set Your Monthly Money Targets

You’ll also see that the plans I put together are ideal plans in that they show no debt other than a reasonable mortgage.  If you have credit card balances, vehicle loans, student loans, or any other type of debt, you’ll have to spend less in some other categories until those debts are wiped out.

By “reasonable mortgage,” I’ve found that keeping housing costs to no more than 25 percent of monthly gross income is a good benchmark.  Housing is typically a person’s biggest expense.  Limiting that expense to 25 percent of income helps make sure that money is available for generosity, saving, and investing.

In some parts of the country, you may have to devote a higher percentage of income to housing, such as parts of California or the east coast.  But I don’t recommend spending any more than 30 percent, even in those areas.  And again, that means you’ll have to spend less in some of the other categories.

Of course, state income and property taxes vary by state, which means I had to use averages in my recommendations.  So, compare what you’re actually spending in these areas with my recommendations and adjust accordingly

Complete Your Cash Flow Plan

Try filling in the “Now” and “Goal” columns of a Cash Flow Plan.  Put estimates for what you’re spending today in the “Now” column.  Then use the recommended spending guidelines to help you fill in the “Goal” column, aiming for a plan that shows total monthly income minus total monthly outgo equaling zero.

Next, transfer your goals to the top row of the Cash Flow Tracker.  Now you know the targets you’re aiming for as you track your spending.  Of course, you can use the same information to create budgets with electronic tools like Mint, Yodlee, and others.

Hitting the targets doesn’t require obsessive frugality, but it does require spending smart.  There are lots of articles already on my site, and plenty more to come, on how to do so in each of the spending categories.

Please let me know what you think of the recommended spending guidelines by leaving a comment below.

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Categories: Planning

6 Responses to “How Much Should I Spend?”

  1. John says:

    I have found 10-10-80 to be a great giving-saving-spending practice.

  2. Matt Bell says:

    I agree, John. That’s a great overall framework. But I often find that people wonder about the details — how much to spend on all the stuff of life. That’s why I spent a ton of time coming up with the recommended spending guidelines. I always found the other guides to be too broad. They would say spend 5 – 15 percent on this or that. But people wanted specifics for their family size and income. It’s not an exact science, but hopefully the guidelines provide helpful benchmarks.

  3. Laraba says:

    I appreciate your advice to focus on saving, giving, etc., to take those things off the top, and then deal with lifestyle questions. I’ve never quite thought of it that way, but you are so right that if lifestyle purchases are prioritized, it is easy to spend all of our income and more on the nice car, the expensive vacations, the too pricey house. I glanced at your very specific guidelines. You obviously put a lot of time into them! My husband has put together a budget that works for us well and he carefully allocates funds for many of the catagories you mention. We are parents to 7 children so obviously our financial outlay in some areas (like food) is higher than in smaller households.

  4. Matt Bell says:

    Thanks for the feedback, Laraba. And I can imagine that with 7 kids your food expenses are higher! But good for you guys for using a budget to find a way to make it work.

  5. Addie Begashaw says:

    I found you through Paula White website. I am a beginner blogger on family’s matters. I believe your information is so much needed by so many. Thank you for your hard work.

  6. Judi Estes says:

    This confirms that most of what we are currently doing and shows me where we need to make some changes.

    I was wondering if you could do a set for a low income family. My daughter and her son are on about 12,000.00 a year and she desperately wants to get established with a budget. I’ve helped her, but it’s hard to show her that she could stay on a budget, even with her income and feel some relief.

    Thanks.

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