The financial community uses budgeting guidelines when reviewing or approving credit. If you do not fit within these parameters, your application could be denied or you may be considered a greater risk and will be required to pay much higher interest rates.
Lenders use these budgeting guidelines because they represent wise spending and smart money management. If your debt exceeds these recommended amounts, then there is a good possibility that you are experiencing financial difficulties and should begin looking for ways to re-balance your household budget.
Reducing your debt and keeping your spending within recommended limits is necessary for debt relief and credit recovery, and is also an important factor in gaining or maintaining control of your finances.
Even if you aren’t struggling financially, assessing your budget on a regular basis to make sure it fits the suggested guidelines is a good way to stay on track and avoid future problems.
Spending Guidelines
These are basic guidelines to give you an idea of where you should spend your money. Since each individual situation will be different, the percentages given are simply recommendations, not hard-and-fast rules. For example, you may not own a car and, therefore, spend a lot less on transportation expenses than the average family. However, your food costs may be higher because you have a large family or choose to eat out frequently. So, some flexibility between categories is acceptable as long as you are maintaining a healthy budget and making wise spending choices.
Use the following list to review the items in your budget:
- Housing 35% – This includes mortgage, rent, taxes, repairs, improvements or renovations, insurance, utilities, and any other expenses pertaining to the maintenance and upkeep of the home.;
- Transportation 20% – This category includes monthly car payments, gas, oil, repairs, insurance, parking, and public transportation fees.
- Debt 15% – Basically any debt except your mortgage and car payment should be placed into this category including credit cards, personal loans, or student loans.
- Personal Expenses 20% – Here you h ave all additional “cost of living” expenses such as food, insurance, prescriptions, clothing, entertainment, dental, medical, prescriptions, or any other miscellaneous expenditures.
- Investments & Savings 10% – This category includes stocks, bonds, savings, retirement plans, rental properties, or artwork.
Balancing Your Budget To Budgeting Guidelines
According to recent statistics,the average American spends a staggering 94% or more of their disposable income, leaving only 3-6% for savings or available cash. With budgets this tight, it can be difficult to plan for unexpected expenses and very easy to build up unmanageable balances of high interest credit cards.
Use our free Money Management Worksheet or our free online household budget form to easily calculate how your household budget expenses compare to recommended budgeting guidelines.
To balance your budget, determine how much of your income is used on each category and look for ways to reduce spending. For example, eating out consumes about 40% of the average family’s food budget. By eliminating just a couple of trips to the fast food restaurant and eating a few more meals at home, you can free up some extra cash for other expenses
See how Mary is working the recommended percentages:
There was a time when I didn’t care about my finances. Actually that’s not entirely true. I cared. I just didn’t know what a budget was. The result of that was very high debt and low self-esteem.We went bankrupt at least twice and still were swimming in debt. The problem is we never learned how to deal with money matters. Part of the problem is my bipolar disorder. The other part of the problem was my husband’s inability or unwillingness to help with the budget. Instead we just bought whatever we wanted, when we wanted and didn’t think about how everything was getting paid for.
It wasn’t that we were living an extravagant lifestyle, we were just living. We both had a job and a regular paycheck and it was easy to know there was always going to be another paycheck. Then three years ago I lost my job. I was making twice as much as my husband, so that was a substantial hit to the pocketbook.
At first it wasn’t so bad, because employment kicked in and we still had somewhat decent money. Then the unemployment benefits stopped. Now we only have my husband’s pay check which is about $1200 a month.
This would seem to be the worst possible situation to be in, but frankly after being married 32 years, this is the best financially we’ve been. Not having any more money available has forced us to really cut back and think about a budget.
A few months out of the year, we still run out of money, but not quite as often as before. Using a budget has really helped. My debt has been reduced drastically over the past 3 years.
Perhaps next year we can actually start to work on the investment part of 10% of the income, but I have to say, we are close in ratio to the budget planning guideline.
It feels good to be working towards a goal, instead of just going through life not knowing what’s going to happen from one day to the next. Now, if something comes up, I can say, we don’t have the money—because I have a budget.
So instead of just running out and buying whatever we feel like, we plan ahead, that’s it, we plan, something we’ve never done before. That’s the beauty of a budget!
Your number one priority should be to get your debt budget below the recommended 15%. Since this category usually includes high interest payments with little or no equity, it is the area that will most impact your ability to obtain credit.
Fixing your debt problem means being honest with yourself about your spending habits and committing to the financial changes necessary to fix the problem permanently.
Making ends meet was not a concern until my second child was born and I quit my job to become a full-time mom. This created a drastic deficit in the family income which required an immediate solution.Consequently, I went online and educated myself on the subject of home budget guidelines. I learned about spending parameters recommended by financial professionals, how to determine my needs versus wants, and suggestions regarding proportions of income to be put in savings and an emergency fund. I found it all very helpful in establishing a budget for my growing family.
The guidelines are straightforward and given as percentages for different spending categories. It was easy to figure out how much of the household income should be earmarked for bills, savings, and the all important emergency fund.
The most difficult aspect was learning to control my impulse spending. I love to shop and have the propensity for buying items I do not really need. To help curb this bad habit, I cut up and cancelled all my credit cards except one, which was put aside and designated for emergency use only.
Financial issues can cause a great deal of stress in a marriage. I found that following the home budget guidelines helped prevent unwanted anxiety and tension in my relationship.
Posted by: Diane
Budgeting guidelines can help you get your finances back on track by giving you an outline of where your spending falls and fixing your spending. Take advantage by using software to help you track and manage your spending like:
If you love spreadsheets, you will love the budget spreadsheets offered by Vertex 42. Some are even free and all of them are easy to download!
Don’t forget, you can print out our Money Management Planner to do your calculations and budget on paper or use our Household Budget Calculator online (they are both free!).