The best predictor of personal financial health is spending less than you make. Living below your means.
But spending is different for everyone. And it is impossible to give prudent advice without knowing the context of the situation.
Looking for external validation on how much to spend on something can lead us astray. This is because spending is largely based on income. Which, again, different for everyone.
With that being said, I do think it can be helpful to have a general gist of what other people are spending money on. Especially when it comes to big ticket line items.
How Much Should I Be Spending on This?
**All references to statistics about the average American are taken from the Bureau of Labor Statistics report**
The average American household in 2020 had a gross income of $84,352. This is before taxes.
The biggest expense for Americans is housing. With the average American household spending 35% of their income on putting a roof over their head. This includes property taxes, mortgage interest, maintenance, repairs and home insurance.
If you are a first time home buyer or renter, it can be difficult knowing just how much you should be spending on your first place. Knowing average numbers like this can help back into a ballpark number of what it is going to take.
What’s interesting to note here is that 28% is usually the rule of thumb when it comes to qualifying for a mortgage from the lender. Meaning, the bank usually wants to see mortgage applicants spend no more than 28% of their gross income on housing. But clearly there is some wiggle room based on other factors such as savings.
The next two biggest items the average American spends money on are transportation (16%) and food (12%), which makes sense when you think about it in terms of necessities. These three line items account for 63% of the average American’s spending.
Again, it’s important to keep in mind that these are all generalities, and that it is impossible to know what is truly “right for you” without the context of your situation.
But housing, transportation and food are the three building blocks of spending. These are the areas that you have to right size for your individual circumstances because they are necessities. If you bite off more than you can chew in one of these three areas, it’s going to be difficult to make up for it in the other, more discretionary areas.
The average American spends 12% on personal insurance needs, 8% on healthcare, 5% on entertainment and 2% on clothing.
As financial planners and investment advisors we are not in the business of telling people how to spend their money.
Our job is to work in the context of our client’s lives and offer feedback on whether or not their current trajectories will allow them to live the life they want in retirement.
The best predictor of a healthy trajectory, like I mentioned in the beginning of the article, is living below your means. And the number that best represents this is an individual’s savings rate, or the percentage of income that is saved rather than spent. The average American saves about 8% of their monthly income.
We’ve said it before, and I’ll say it again, a financially sustainable retirement is more about spending reasonably than it is about investment returns. You can’t reliably invest your way out of poor spending habits. And for retirees, the amount of risk needed to do so would make any fiduciary investment advisor nervous.
Personal spending is probably the most important area of personal finance. But the word I want to emphasis here is PERSONAL. Only you can figure out what the “right” amount of money to spend is. And it surely will take some trial and error. Hopefully now that you know what your average fellow citizen is spending, it can help you figure out what that means for you.