Ultimately, you shouldn’t be concerned if your monthly expenses don’t match the averages listed above. For one thing, the cost of living can vary widely depending on where you live in the country. On the other hand, your budget should be based on your priorities, and everyone’s priorities will be a little different.
For example, one person may choose to prioritize entertainment spending over clothing and services while another may prefer the other way around.
How to budget for household expenses
Now that you’ve seen what the typical American spends per month, the next piece of the puzzle is learning how to budget for yourself. For the most part, this happens in three stages. We’ll walk you through the process from start to finish below:
Track your spending
The first step in creating a budget is to track your spending or take an in-depth look at where your money is going each month. After all, a big part of budgeting is allotting realistic amounts of money into expense categories, and that will be difficult to do if you don’t know how your money is currently being spent.
There are several ways to do this, including:
- Follow the old-fashioned route and collect receipts.
- By going through your account statements.
- Use of an expense tracking application.
Whichever method you choose, you’ll want to make an effort to track your spending for two to three months so you get a feel for what you’re spending on average.
Choose a budgeting method
Next, you will need to choose the budgeting method that best suits your needs. While there are a ton of variations out there, most are based on one of the four main methods. Here they are for your consideration:
The 50/30/20 budget
The 50/30/20 budgeting method is fairly straightforward and simpler than some of the other methods on this list. This involves sorting your budget into three distinct categories as follows:
- Your needs (50%): This section represents 50% of your budget and includes all your needs, such as housing and utilities, groceries, insurance and minimum monthly loan payments.
- Your desires (30%): In this case, your discretionary spending is 30% of your budget. Usually, these items are nonessential extras that make up the “fun” part of your budget. They can include things like monthly subscriptions, restaurant meals, travel, and other entertainment purchases.
- Savings and debt (20%): With this method, savings and debt (any payments you make above your minimum payment) make up the remaining 20% of your budget. It could mean things like paying off your credit card debt or student loans, or saving for retirement or some other personal goal.
The payment budget yourself first
The pay-first method is also fairly straightforward and prioritizes savings. With this method, the first thing to do is decide how much you can afford to save each month. Then you set up an automatic transfer to transfer that amount to a savings account as soon as you get paid each month.
Once that’s done, you make do with what’s left over, both for your needs and discretionary spending. With that in mind, while this method will guarantee you savings, you should definitely make sure that you leave enough money in your account to cover your bills.
The envelope system
The envelope system becomes a bit more complicated. Here, you decide beforehand how much of your monthly budget you want to allocate to each category of expenditure. You then withdraw the corresponding amount in cash for each expense category and place it in a separate envelope.
Throughout the month, whenever you need to spend money, you take it out of the envelope for the appropriate expense category. For example, if you were to do your shopping, you would take the money out of the envelope for your food expense category.
Once the money in each envelope is gone, spending in that category ends for the month, unless you want to borrow from another envelope. Be careful, however, not to borrow too often. It’s an easy way to run out of cash before the month is up.
The zero-based budget
Finally, a zero-based budget works similarly to the envelope system, except you don’t need to use physical envelopes and cash. To do this, you take your income and divide it into different expense categories until there is nothing left.
Since this method relies so closely on accurately estimating your expense categories, it is a good choice for those who are seasoned budgeters who are very familiar with what they spend each month.
Create your budget
Once you’ve decided which method works best for you, the last step is to sit down and create your budget. While this process can take a little time, it’s important to review your spending over the past few months and use them to direct your funds where you feel most appropriate.
Remember that budgets can always be adjusted as you go. In fact, the initial budget you will make will probably serve as an estimate. After you’ve done your best to stick with it for a while, it’s a good idea to adjust it as needed until you end up with a plan that closely mirrors your spending habits.
How to save money on household expenses
Finally, no matter what your income, it’s never a bad idea to try and save money on your household expenses. To that end, we’ve presented some handy tips that you can use to put extra change back in your pocket.
Make sure your subscriptions are up to date
It might sound obvious, but monthly subscriptions can take a toll on your budget, especially if you’re not using them. After you’ve tracked your expenses for a while, go through your receipts and account statements to see if there’s anything worth canceling. If you have multiple subscriptions that perform the same function, such as Netflix (NASDAQ: NFLX) and Hulu – consider narrowing down to just one.
Start planning your meals
According to the Bureau of Labor Statistics, the typical American spends $ 660 per month on food costs, between groceries and dining out. It’s a big expense. One way to reduce this cost is to make an effort to plan your meals in advance. On the one hand, it will help you cut down on impulse shopping at the grocery store, and on the other hand, you will be able to spend less money to eat on the go.
Rethink the way you shop
On a related note, it may make sense to be more thoughtful about how you shop. If you haven’t already, you might want to focus more on shopping sales, discount coupons, and wholesale purchases. Whenever possible, buying second-hand is also an easy way to keep items low cost.
The bottom line
Some living expenses may be unavoidable, but that doesn’t mean your expenses should rule your life. In fact, with a little planning and preparation, it’s entirely possible to set a monthly budget that suits your needs. When combined with taking action to cut excess costs, effective budgeting is one of the best things you can do to start taking control of your finances.