By [http://ezinearticles.com/?expert=Brad_Homer]Brad Homer
The typical American household budget percentage breakdown looks like the list below. For most of the categories a range is shown. A range makes more sense to help you see where your personal budget fits (or doesn't fit.) If your budget doesn't fit the typical American household budget, rejoice! The average American household budget is jacked up - we carry too much debt and we just don't save enough. We're so worried about our neighbor's new pool, our co-worker's new car and our friend's new designer shoes that we spend more than we earn to try and keep up. But take heart! Review the percentages below, compare your household budget and then read on to find out how you can move yourself into the elite minority of Americans who have mastered where their money goes.
Typical Household Budget Percentages
33-38% Housing (59%-66% of this is on shelter - mortgage interest, property taxes, repairs, and rent, and other items)
15-19% Transportation (up to half of this is vehicle purchase - 2 cars per household average)
13-14% Food Budget (55% at home, 45% away)
0-3% Tobacco and related products
0-2% Caffeine related products
4-5% On clothing and related services (drycleaning)
4.5 - 6% on out of pocket Health Care
9% Personal Insurance and Pensions (breakdown: 1% life and other personal insurance, 7.5% Social Security, .5% investment
2.5% Charitable Contributions
2% Reading and Education
1% Personal Care products and services
4% Credit Card, Consumer Loan Interest
If your budget closely matches the above, here's what you can do to fix that. Do these in order. Do not proceed to the next step until you've addressed the current step:
Stop using your @#!&*! credit cards!
Make a down and dirty budget right away! Don't worry about it being right at first...you can perfect it over time. Just do it!
Cut back on your easy to identify, frivolous spending habits (3 dollar lattes, magazines, 450 extra satellite channels, etc.) If you've got some expensive habits you've wanted to quit for some time, now's the time. For example, if you're a hard-drinkin', chain smokin', coffee drinkin' fool, you can reap a windfall of up to 7% or more of your income! Just cutting back to 2 drinks per day, only drinking coffee from home and quitting the cigarettes will net you a nice amount of extra cash and add years to your life! Refine your budget after eliminating what you can.
Reduce your 401K and other investment payments (if you have any) to the minimum allowable to keep your 401K and/or other investment accounts open. If your employer has a stock matching plan, keep that in addition to the minimum to keep your investments accounts open (but only up to the minimum you need to get all the matching money.) You're going to reap a whole lot more return on paying off your debts than you can ever hope to reasonably get from traditional investments. If you're paying into a college fund for your kids - keep doing that - if you're not and you really want to, hold off until step 6. Refine your budget to reflect the extra income available, if any.
Build an emergency fund equal to 2% of your gross annual income. It should be a little hard to get to (like a separate checking account or mutual fund), but not too difficult (Certificate of Deposit.) Work this into your budget - it's very important. You will not believe the amount of stress that will melt away when you do this.
Pay off your debts - everything except mortgages. And don't just move your revolving debt into a second or third mortgage - that's bad. Pay them off using a rapid debt paydown system. Pay off any student loans (for future reference, these are a bad idea.) Pay off your car(s) too. If you're not upside down on a car loan (your car is worth more than you owe) you can sell it and get a cheaper, paid for car. Throw a small (inexpensive but fun) party for yourself and your loved ones every time you pay off a debt.
Take all the money you WERE spending to pay off your non-mortgage debt and start putting it into those investment accounts you put on idle. Make sure you're investing at least 10% of your gross income. If you followed steps 1-4 exactly, you should have lots of breathing room in your budget now. If this is true and you want to invest more than 10%, go ahead, but be sure to reward yourself too and live a little. Grow your emergency fund to a level you're comfortable with (2 or more months of income is a good start.) If you have young kids and you want to send them to college, start putting money into a college fund of your choice for them, if you haven't already. Throw a bigger party than usual when this is done.
Pay off your mortgage and throw your biggest party yet! You can start towards this by refinancing to a single fixed rate mortgage (your credit should be in pretty good shape having paid off all your other debts.) If it's a 30 year mortgage, pay more than your monthly payment to dramatically lower the amount of interest you give to the bank. If it's a 15 year fixed - wow! That's excellent!
When you're totally debt free, regularly give away whatever you think you can afford. It's good for the soul!
Easy? Not. Worth it? Doing the above will pay dividends in your life in many more ways than just dollars and cents. You will assure yourself a dignified and financially secure retirement. Do this well and you will also build a way for your kids and your grandkids to enjoy prosperous lives, and they will remember you with fondness and respect long after you've moved on to the other side. Now get started!
Brad Homer offers free-to-try software to help you quickly and easily with your budgeting and rapid debt repayment [http://www.homerworks.com] planning. At his website you can also find more budgeting articles [http://www.homerworks.com/personal_finance_articles.html] like this one.
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