Your budget should answer one big question: How much should I spend on stuff? But it can be hard to know the right answer.
If you've thought at all about making a budget, you've probably encountered a pie chart. These charts tell you exactly what percentage of your money should go toward housing or food or transportation. Lots of personal finance writers use these pie charts. Even Oprah has one.
I depend, (probably to an unhealthy extent) on data and consensus, rather than instinct, to make a lot of decisions. So in the past, when I've made budgets for myself, I usually throw up my hands and ask: What do normal people spend? (Not that I'm not normal.)
I recently decided to find out. Lucky for me, there is publicly available data showing exactly what people spend on average, in the form of the Bureau of Labor Statistics Consumer Expenditure Survey. This survey collects data on the income and expenditures of Americans.
I took the BLS data for 2016 and made a pie chart of my own, showing how the average American spends their money.
Take that Oprah! Now I know how the average person spends. But this presented another dilemma: The average person can make some pretty terrible decisions. I often completely disagree with the average person, and they with me. So I called an expert to see how my "average American" budget could be improved.
A deceptively powerful concept
Pie charts like this can be a useful benchmark, especially for people who have never made a budget before, said Todd Curtis, chief customer officer for You Need a Budget, a budgeting software company. They can provide an idea of whether your spending is in the ballpark of where it should be and they illustrate that you have a finite pool of money. People often get in trouble when they try to repeatedly spend the same dollar.
"That's a really simple concept but it's deceptively powerful," he said.
One of the immediate changes the average American can make is to spend less on food away from home. Eating out is usually more expensive than making food at home. Entertainment may also be an easy place to cut back. Apparel, too.
Aside from Social Security and, for some people, health care, most people can adjust their spending in any of the BLS categories, Curtis said. That includes housing. If you're renting, you may be able to get a roommate or a place that's smaller or farther from a major city.
Homeowners can save as well. Many people think when they buy a house they're stuck with it, but if the costs are really too much to bear, homeowners should explore financing options or consider selling. People often assume they need the things they have. Curtis and his family recently went from two cars to one and he noticed all the times they thought they needed two cars, they really didn't.
"Once we didn't have two cars, we didn't need two cars," he said.
But the biggest flaw in the average American's budget is that they're not prepared for an emergency. The only thing in the chart that relates to savings is pensions and Social Security, money people can't touch until they retire. The average American earned $74,664 before taxes in 2016 and spent $57,311, according to the BLS. That's not much margin after taxes, especially in more expensive states.
This isn't the only federal data to show this. A recent Federal Reserve survey found nearly half of Americans wouldn't be able to afford a $400 emergency.
Bye, bye, American pie (chart)
So it may not be such a great idea to emulate the average American pie chart. But the same is true for Oprah's pie chart. Or anyone else's.
Each person's situation and priorities is different, so each person's budget will be different. Take food away from home vs. at home. It's easy to say to go to the grocery store more if you live in the suburbs, but if you live in New York, where groceries are more expensive, eating out may not be such a bad value. Or if you're set on only eating organic food, your food budget is going to be bigger than most.
Budgeting is about accepting that your resources are scarce, and prioritizing those resources, Curtis said.
"People are afraid of budgeting sometimes because they feel like they're not going to have enough," he said.
But budgeting is about having enough for the important things, like having enough to eat, making rent and, unlike the average American, saving for future goals and emergencies. It's your priorities, not the percentages on a pie chart, that should guide your budget. It's deciding, if you want to have a house one day, to save for a down payment instead of splurging on clothes or gadgets.
Your real expenses won't fit neatly into percentages. If you bought a car, your loan payments and car insurance premiums are what they are, no matter what percentage of your income is supposed to go toward transportation. Those obligatory payments are your biggest priorities and your budget should reflect that. With what's left over, you can make a place in your budget for smaller priorities — things that are wants rather than needs — like vacations or drinks with friends, Curtis said.
So how much should you spend on stuff? There's no one right answer. Averages and pie charts can be helpful, but your budget should be based on who you are and what you value.
