From a previous post, we know that the average expenditure by U.S. consumers is huge.
According to the Bureau of Labor Statistics (BLS), the latest data for 2018 shows the average U.S. household spends $61,224 a year and earns $78,635 a year. Spending $5,102 a month on average is good living.
See the data for yourself in the chart below. Notice how the average income before taxes jumps a healthy 6.9% from 2017 to 2018, while the average annual expenditure only increases by 1.9% during the same time period.
Americans are getting richer AND saving more! The 2019 numbers will probably look even better when they come out in 2020.
With so many line items in the expenditure budget, I thought it would be interesting to focus on the four major expense items:
The Average Percentage Expenditure On Housing, Food, Transportation
According to the BLS, the average percent of total expenditures spent on housing is 32.8%, 15.9% for Transportation, 12.9% for Food, and 8.1% for Healthcare. This totals 69.7%.
Nobody really cares about Apparel and Services.
But notice a really interesting expense: Personal Insurance and Pensions. Personal Insurance and Pensions is essentially forced (Social Security and Pensions) and unforced savings. It averages 11.9%. The higher this percentage, the better.
If you read the many complaints in my $300,000 and $500,000 middle-class budget posts, you’ll notice some people are mad that I include 401(k) and 529 plan contributions as an expenditure. They say I’m wrong and stupid.
But guess what folks? When creating an income statement, you either have to classify the item as an income or as an expense. Paying upfront to ensure a more financially secure future is an expense.
If you don’t believe classifying retirement savings is an expense, then take it up with the Bureau of Labor Statistics!
One of the biggest reasons why the fear of running out of money in retirement is overblown is because worker bees FAIL to account for or believe that saving for retirement is an expense.
Here’s the thing. If you’ve really saved enough for retirement, you no longer need to save for retirement in retirement. Suddenly, that expense is gone and you may have more cash flow than anticipated.
How Do You Compare To The Average Expenditure?
Based on these latest expenditure statistics, the average American is doing well. Income is up, savings rates are up, and we’re 10+ years into a bull market.
But let’s say living well isn’t good enough. You want to live GREAT and be much better than average with your one and only life.
What should your target expenditure percentages per category be to help you achieve financial freedom sooner, rather than later?
I’ve got the answers for you.
Target Expenditure Percentages By Category
Housing: 31.1% Average vs. Recommended 20% Or Less
Transportation: 15.9% Average vs. Recommended 10% Or Less
Food: 12.9% Average vs. Recommended 10% Or Less
Healthcare: 8.1% Average vs. Recommended 8% Or Less
Average Total: 69.7% versus Recommended Total 48%
Unfortunately, you can’t do much about reducing Healthcare expense since it is highly regulated and restrictive. Unless you want to take more risks, drastically reduce your income to get healthcare subsidies, or move to Canada, I’ve kept the budget percent inline with the average.
Meanwhile, instead of only allocating 11.9% of your budget to Personal Insurance and Pensions (Savings/Investments), I recommend ramping the percentage up to at least 30%. Once you can get to a 30%+ savings rate, you should be well on your way to financial independence.
Your ultimate goal should be to consistently get to a 50%+ household savings rate. One of the easiest ways to achieve a 50% savings rate is to try and save 100% of one bi-weekly paycheck each month and save most of your year-end bonus, if any. If you have a spouse who earns a similar amount, you guys can try and save 100% of one spouse’s income as well.
Once you’ve got your savings/investing rate at a high level, everything else will fall in place. Conversely, once you fix your Housing, Transportation, and Food expenses, it’ll be much easier for you to save and invest.
The Missing Variable: Income
To slash Housing, Transportation, and Food costs by roughly half while increasing your Savings / Investments to 30% or more is difficult on an average income of $78,635. However, the missing variable to this equation is aggressively growing income.
It’s extremely hard to frugal your way to early retirement. Instead, your concurrent goal should be to double or triple your income by finding extra work, getting promoted, switching industries, starting a side business, working longer hours, learning new skills and more. It won’t be easy, but nothing good comes easy.
I’m positive that if you follow my Aggressive column, you will achieve financial independence within 15 years. If you follow the Target column, financial independence will be yours within 25 years. It’s up to you to figure out the right balance.
Follow The Recommended Expenditures
Hopefully, nobody feels sorry for Americans who are able to spend $61,000 a year while saving 11.9% for retirement on average a year. We are truly living in the best of times in the greatest country in the world.
If you get to spend more than $61,000 a year, there’s no real sense of urgency to retire early. But for those of you who don’t like your jobs or can’t see yourself working for 30+ years, then the only way to get out is to tighten your budget, earn more income, and follow my recommended expenditure targets.
Owning your primary residence long-term is important because you get to sidestep inflationary costs while also benefitting from an inflating asset. The return on rent is always -100%, no matter how much you want to believe otherwise.
Forcing yourself to drive a humble car, take public transportation, walk, bike, or take an Uber pool will also help you stop pissing away your money. Spending too much on a car is probably the #1 personal finance killer in America.
Meanwhile, the data shows most Americans are eating far too much. To save money on food and lose weight is such a great combination! Heck, if you lose weight, there’s also a chance your healthcare costs may go down as well.
With the average wage, saving at least 30% of your income is possible. Whether you do so or not just depends on how quickly you want to achieve financial freedom. Everything is rational in the end.
When I was making just $40,000 a year in Manhattan, I maxed out my 401(k) and lived in a studio with a friend because I knew I wouldn’t be able to last for more than 20 years in the finance business. It was simply too brutal. Therefore, I lived like a college student for years and diligently saved.
For those of you with cushy jobs and single-digit work hours per day, you are in danger of not saving enough because your work life is too good. You need to seek PAIN and DISCOMFORT to get you more financially motivated.
Do not expect the good life to continue indefinitely. Force yourself to save more because nothing good lasts forever!
Bottom line: If you want to be financially above average, you need to spend below average and earn above average. There’s no way around it.
Want to reduce your housing costs? Get some real refinance quotes from Credible. Mortgage rates are back down to all-time lows. Time to take advantage. I recently refinanced my mortgage and my housing expense is now the same as it was back in 2004, despite a large increase in net worth and a large increase in my home price.
Invest in commercial real estate: Take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Denver, Austin, Memphis, and Charleston. Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.