Budgeting & Spending: A Frame of Reference for Thinking About How Much to Budget and Spend (Post #8)

In our last blog post, we provided a practical framework for thinking about and creating a personal / household budget. As part of that framework, we laid out broad personal spending categories that you may want to consider when you become an adult to classify the various types of expenses you will or may face and, therefore, that you will want to budget for. Those personal spending categories are the following:

We also, in our most recent blog post, provided some examples of expenses typically associated with some of these broad spending categories. As a reminder, here they are again:

What we have yet to cover in our Budgeting & Spending blog posts thus far, though, is a frame of reference for thinking about how much to budget and spend on individual spending categories. How much we spend on what is obviously a hugely important issue. After all, you do not want to run into financial trouble because you have overspent on one set of expenses to such a degree that you are left with insufficient funds to cover other expenses, especially non-discretionary expenses. Non-discretionary expenses represent spending on necessities (i.e., the things we absolutely need – think housing, food and water, transportation, and healthcare, for example). In contrast, discretionary expenses represent spending on non-essential items. (Think the latest and greatest electronic gadget that you know you really don’t need, dining out at a restaurant that is relatively more costly, buying concert tickets, or subscribing to a fifth streaming service, for example.) Now, like you, I most definitely cannot speak from experience to this issue of how much to spend on what. However, there are rough budgeting guidelines that personal finance experts commonly cite and it is those guidelines that we will share here.

Let’s begin at a high-level with two sets of broad budgeting guidelines personal finance experts commonly recommend.

The first is what is referred to as the “50/30/20 budget rule”. The 50/30/20 budget rule is a set of broad guidelines involving the following recommended personal / household budget allocation:

(Take-home income represents your income after income taxes and other items have been “deducted” --i.e., “withheld” or subtracted -- from one’s paychecks.)

The second is what is referred to as the “70/20/10 budget rule”. The 70/20/10 budget rule is a set of broad guidelines involving the following recommended personal / household budget allocation:

(Take-home income represents your income after income taxes and other items have been “deducted” --i.e., “withheld” or subtracted -- from one’s paychecks.)

Note that the numbers in the two charts above represent spending targets as a percentage of one’s take-home income, NOT as a percentage of one’s gross income. Gross income represents one’s income BEFORE income taxes and other items have been “deducted” (i.e., “withheld” or subtracted) from one’s paychecks. Take-home income represents one’s income AFTER income taxes and other items have been “deducted” (i.e., “withheld” or subtracted) from one’s paychecks.[1]

As always, to the degree you eventually choose to adopt any set of broad budgeting guidelines, which naturally are targets, you may want to or need to modify one or more of them based on your personal or household circumstances. For example, if as an adult you earn just enough to “pay the bills”, then saving 10% or 20% of your income simply may not be possible. Alternatively, if one of your personal financial goals when you become an adult is to buy an expensive sports car, then you may need to save more than 10% or 20% of your income. Either way, you would need to adjust your budget targets accordingly. So please don’t think of each set of guidelines as a “hard” set of rules or a one-size-fits-all prescription, but rather as a frame of reference or broad conceptual framework that you eventually can adjust in practice based on your unique personal circumstances.

Now let’s drill down into more granular budgeting guidelines personal finance experts commonly recommend. Given that the types and amounts of discretionary expenses people choose to incur are highly person / household-specific, our focus here will be spending recommendations of experts on specifically non-discretionary expense items, i.e., things we absolutely need. Note that the numbers in the chart below a) represent maximum spending amounts, NOT target spending amounts, and b) are as a percentage of one’s gross income, NOT as a percentage of one’s take-home income.

Once again, please don’t think of these guidelines as a “hard” set of rules or a one-size-fits-all prescription, but rather as a frame of reference or broad conceptual framework that you eventually can adjust in practice based on your unique personal circumstances. The fact is, that when we become adults, the amounts we each budget for different expenses will inevitably be influenced by factors like our personal income, our personal savings, the cost of living in the areas we reside (for example, housing in big cities is often more expensive than housing in small towns and rural areas; food costs vary geographically as well), the number of people we need to financially support (for example, just ourselves, a significant other, one or more children, etc.), the mode of transportation we will need to get around, our health care needs, our debt obligations, any education expense obligations, our age, etc. etc. As a result, each of us inevitably will need to increase or decrease at least some of our budget targets for these individual expense categories.

As we mentioned in our last blog post (“Budgeting & Spending: A Practical Framework for Thinking About and Creating a Personal Budget”), remember that a budget -- like the one illustrated below -- should be a “living and breathing” document. Yes, it is super important to live within your budget. But it also is completely appropriate and prudent to make changes to your personal or household budget as facts and circumstances change.

I would love to hear from you. Any ideas, experiences, thoughts, comments and questions….please do share.

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[1] Employers commonly “withhold” (i.e., “deduct” or subtract) a portion of their employees’ pay in order to cover on their employee’s behalf what are called Federal “payroll taxes” (“payroll taxes” are used to fund Medicare and Social Security, both of which are large US government spending programs) as well as Federal, State and perhaps local income taxes. Employers are required to do this. It is also not uncommon for employers who provide health insurance and/or retirement benefits to their employees to “withhold” (i.e., “deduct” or subtract) from their employee’s paychecks a portion of their pay to partially cover the costs of these benefits.