Personal Finance 

The Ideal Budget

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I was poking around CNN Money’s Money 101 “classes” today when I stumbled upon a budget calculator they had devised. They classified an individual’s five most significant budget categories and specified what they felt was an ideal spend as a percentage of your salary. The categories and recommended ideal spend percentages were:

  • Housing & Debt – 30%
  • Taxes – 25%
  • Insurance – 4%
  • Savings & Investment – 15%
  • Living Expenses – 26%

What’s interesting is how they broke down all spending into those categories which vary in “width.” Insurance has a mere six subcategories (Life, Health, Disability, Auto, Homeowner and Other) whereas Living Expenses has a whopping sixteen categories ranging from gasoline to food to private school tuition – I wonder how they arrived at those subcategories and those groupings. As a sidebar, most interesting was the grouping of mortgage and debt… including credit card debt. I can understand grouping debt together but wouldn’t you at least, symbolically, split up a mortgage loan and a credit card debt?

One positive? The consideration that 15% of your gross salary should go towards savings and investment. I’ve been a little derelict in my finances, partially because my laziness has been subsidized by the income from this blog, and I don’t specifically “save” any of my income outside of a 401(k) pre-tax deduction. While I don’t explicitly save, everything outside of a few thousand dollars is sent off to my Emigrant Direct account for safekeeping. Once my financial situation is more stable (after my new job’s direct deposits start, my billpays have moved from my former employer’s credit union to my new Bank of America account, etc.) I plan on opening an account with Vanguard and investing excess (savings greater than our emergency fund needs) funds in some index fund.

As for the rest of the numbers, I’m lower on Housing & Debt, Taxes, and Living Expenses and I’m higher on Savings & Investment (which is good) and Insurance (which isn’t that surprising for someone who drives a car and is under 30 and has health insurance). So… how do your numbers compare?

{ 10 comments, please add your thoughts now! }

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10 Responses to “The Ideal Budget”

  1. June says:

    Housing and debt might be grouped together to deal with the mortgage issue? In reading about the amount of mortgage that a person can afford, I’ve seen it written that your mortgage, plus all other debt, should come in around 30 percent.

  2. AJD says:

    Here’s our rough breakdown

    Housing and Debt: 13% We have no debt other than mortgages on our primary residence and on a rental.
    Taxes: 21.7%
    Insurance: 5.6%. The 4% estimate seems low given normal employee contributions for health care, auto, home, etc., although we might come close if we didn’t have an MG roaster as a third car.
    Savings and Investment: 20%. 401(k), Roths, Rental Property, and a little taxable savings.
    Living Expenses: 27.6% (Note that this includes savings for auto purchases, which would be under Housing and Loans if we borrowed to purchase vehicles)

    And one other category that seemed like a major oversight on their list.
    Charity: 12%

    And just one summary comment: we sure wouldn’t be able to sustain the life we enjoy, invest significantly, and give generously if we were at the 30% debt level they recommend.

  3. Frank says:

    How do you guys keep your taxes so low?

    Here’s mine:

    Housing and Debt: 21.9%
    Taxes: 32.87%
    Insurance: 4.37%
    Savings and Investment: 19.28%
    Living Expenses: 21.21%

  4. Jason says:

    If I ignore balance transfer debt then my numbers aren’t too far off. Taxes is the one that doesn’t add up for me, being that I’m in college and not paying hardly any income tax. Investing was the highest, being over 30%.

  5. Matt says:

    “How do you guys keep your taxes so low?”

    Can’t speak for the others, but this is my strategy:

    1. Start a business. Or three. Schedule C is a great way to cut your AGI…and if you _make_ money, then cool…you just made money. 🙂 (I’m lucky in that all of my profitable clients are international, so I can structure my business in such a way as to defer or avoid US taxes on the income from them, while writing off the cost of soliciting new business here in the States. But that’s an esoteric strategy that doesn’t apply to most small businesses and cost me about $8000 worth of accountant-hours and tax-lawyer-hours in order to arrange.)

    2. Drive across the border to a low-tax state in order to buy things…especially anything with extra excise taxes in addition to regular sales tax. Or better yet, do as I’m doing and _move_ to the low-tax state.

    3. Avoid staying in hotels unless you can write off the trip. Hotel nights are taxed at a usurious rate almost everywhere.

    4. If you’re married, consider a one-career family.

    5. Contribute massively, up to the absolute legal limit, to 401k and IRA plans. Not only can you do this with pre-tax money, but it also cuts your AGI, which can sometimes be enough to reduce your rate. (Roth IRAs are good too, of course, but they don’t affect your tax situation in the present.)

    6. (Not reccomended) Reduce your actual income. I’m a pretty hardcore tax-hater, but even I’m not so hardcore that I’d do that.

    7. (Cheating with statistics) Spend, spend spend! The more money you spend unnecessarily on other things, the lower the percentage of your budget going to taxes will be. (You’ll pay more taxes in absolute dollars, but the percentage will still drop, so your budget percentages look better, even though your long-term outlook will be bleak.)

    8. (REALLY not reccomended) Cheat. Most people who cheat on their taxes don’t get caught. But if you’re one of the unlucky ones, you can do serious prison time. So don’t. Seriously.

    Those are pretty much the only immediate-term ways I know of to reduce your tax burden. Long-term is easier…vote the Club for Growth slate. 🙂

  6. AJD says:

    Frank – in answer to your question about taxes:

    I don’t do anything as esoteric as Matt’s solutions (although he certainly seems to have found some innovative tax-avoidance strategies)

    Our methods are pretty simple:
    –Our share of a rental house shows a loss every year, thanks to expenses and depreciation (of course we’ll pay for that someday)
    –401(k), mortgage interest, and charitable contributions keep us well in the 15% federal bracket. So our total federal tax is ~7% (10% up to 15,100 and 15% up to ~45-50% of our gross – the rest is deferred or deductible). FICA, state income tax, and property taxes add another 7.6%, ~6-7%, and 3% respectively.
    –We usually file a schedule C for side businesses, but it’s never been a sizeable portion of our income or shown large losses.

    If we do end up bumping up against the 25% bracket, I may move some contributions from Roths to 401(k). I’m happy paying 15% now for the break later. Maybe not 25%.

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  8. Aimee says:

    I have heard this breakdown for years and think it makes good sense. However, recently the stats are showing that most people spend 50% of their income just for housing (not including other debts). I have seen this as true in real life, where renting is now just as expensive as owning, and both can eat up half your monthly income even if you are being modest in your purchase. That is why so many people fell for bad mortgages like arms and interest only, they just couldn’t afford to pay what it really takes.

  9. Debbie says:

    I keep my taxes low by a) having an income that keeps me in the 15% tax bracket, b) donating to charity, c) itemizing my deductions for income tax purposes, and d) not spending much on things that have sales tax. The mortgage doesn’t have a sales tax of course. Also I seem to get a lot of things like dance lessons from nonprofits or like books from online sources that don’t charge sales tax.

    I’m not yet organized enough to make exact calculations, but I spend less than average on housing because I have a housemate and live somewhere small. I have no debt other than my mortgage. I probably spend more than 4% on insurance–I have health insurance, dental insurance, auto liability insurance (not collision–my car is 15 years old), homeowner’s insurance, and flood insurance. I’m also thinking of getting life insurance in case I die before my parents do. I spend more than average on retirement savings and vacations; those are my priorities.

  10. AO says:

    I just bought a home in the bay area and believe me there is no way I can stay at the 30% mark. I put 20% down to avoid PMI and yet I spend 50% of our income just for housing (not including other debts). We wanted a home and love the area but it sure does kill your savings. Many our friends are just moving away to cheaper states.

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