Dos and Don'ts for Budgeting Personal Income
ALEX CHADWICK, host:
From NPR News, it's DAY TO DAY.
Many of us know the rule that no more than one-third of our income should go to pay for housing, but what about the other things: transportation and food and food and clothing and vacations? There are budget guidelines, and here with them, Michelle Singletary, our regular personal finance contributor. Michelle, the other major expense categories - what are they, and how much should people be spending in each area? Is there really a rule?
MICHELLE SINGLETARY: Well, that's not a hard and fast rule, but the major items are housing, food, transportation and unfortunately, debt. Savings should be at the top. Really, it's not, because so many people are in debt. Now, you've already said about a third of your income, but around 27 percent for housing, 21 percent for food, about eight percent for transportation - although people go way over that. And then, you know, personal debt - you ought to keep it really at about five, but most people are 14 percent or more. The key about these percentages is that they'll be different for everybody, and also different depending on where you live. If you…
CHADWICK: Where do you get these numbers from?
SINGLETARY: Money Management International, which is a credit counseling organization, and I asked them about some budget percentages. Now, granted they deal with folks who were already in financial trouble, so their percentages might be a little low. But there's no one organization that has the steadfast, absolute rules of these percentages. So you should use these as a guideline. And there are ranges. Like, for example, housing - anywhere from 20 to 35 percent would be a good range.
For transportation, anywhere from six to 20 percent would be acceptable. And obviously, if you live in an area like L.A. or metro area where you might need a car or cars, it would, you know, skew to the higher percentage range.
CHADWICK: How about items like dry cleaning costs or subscriptions to magazines that might help you in your work, or books or a computer that you might need in your work? Are those counted as necessities or luxuries?
SINGLETARY: Those type of things are definitely not necessities. I mean, you can, you know, go to the library and get books - magazines, the same thing -dry cleaning, (unintelligible) that don't have to be dry-cleaned. As the parent of three children, listen, I look at the labels now and - because those rug rats be putting their little sticky hands on me all the time and I'd have to dry-clean things all the time. So I went to washable wear.
If your budget is really tight and you know you're spending in that higher range for housing, 40 percent. If your transportation is at that higher range of 20 percent, if your utilities is at their higher range of seven percent -that means you got to cut somewhere. You got to have lights on. A lot of us has to drive. We got to have shelter, so that means you got to cut in those other areas that are not a necessity.
CHADWICK: And these guidelines that you're talking about, these are just things that kind of help you - no matter what your circumstance - understand what you should be paying or could be paying to kind of achieve financial health.
SINGLETARY: That's exactly right. This is just a barometer, but you got to have a starting point. People budget first by looking at how they spent and then trying to fit it in to their income - that's the wrong way. You got to have a guideline, a percentage guideline. And then, fit your spending into that guideline and then readjust it depending on where you are in life: if you're retired, if you're single, if you have children, if you live in a high cost area. All of those things are factored in so that you can have a barometer, but you got to have that plan.
CHADWICK: You know, Michelle, I'm going to stop talking to you and have my wife call you up sometime.
(Soundbite of laughter)
CHADWICK: Michelle Singletary, our regular guest for conversations about personal finance. Her latest book is Your Money and Your Man: How You and Prince Charming Can Spend Well and Live Rich. Thank you, Michelle.
SINGLETARY: You're welcome.
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