How do you know if you are spending your money wisely or not? How much is too much for different expense categories? While every household budget is different (you may have kids, someone else lives alone) credit counsellors and financial advisors often use specific spending ratios to analyze living expenses, housing and transportation costs.
A spending ratio is simply the amount of money you spend in a particular category as a percentage of your overall budget. Your ‘budget’ is defined as your take home income. You should monitor your ratios as part of your budget review. If you are spending a little too much in one area, make a plan to cut back.
Housing Costs Ratio
Housing expenses usually consume the largest portion of your budget. Housing costs include your rent, mortgage payments, property taxes, repairs and maintenance costs and utilities such as hydro, gas, water and telephone services.
If your housing costs make up more than 35 percent of your budget, you’re paying too much for housing and should look for ways to reduce these costs. You may have to make some tough decisions if you find that you own more home than you can afford.
Transportation costs include public transportation, car loan or lease payments, gas costs, car insurance, maintenance and repairs, even taxis and parking fees. Transportation costs should make up no more than 20% of your income. Shop around for a better insurance rate, car pool if you can, combine trips. If you have to, get a cheaper car.
Living expenses include food, clothing, entertainment, medical costs and other personal expenses. Your total remaining living expenses should be less than 20% of your budget. While individual items may be small, in aggregate they add up, so here is a great place to look for easy savings.
Excluding your mortgage and car loan costs, your other debt repayments costs should average no more than 15% of your total budget. This will include payments for credit card debt, personal loans, student loans and any unsecured debts.
A word of caution. If you meet this ratio because you are paying only the minimum payment on your credit card debt you have too much debt. It takes many years to pay off a debt when you only pay the minimum and the resulting interest costs eat up a huge portion of your budget.
If your debts are under control, then savings should account for at least 10% of your overall budget. If you owe too much in credit card or other high cost unsecured debts, this amount should be applied towards debt repayment first, then long term savings.
These ratios are guidelines you can use to look for areas in your spending plan that you might need to improve. Combining these recommended spending ratios with your overall financial goals is the key to preparing a successful personal budget.