America is one of the richest countries in the world. We have huge household budgets to prove it. Let's look at the average household budget in America to explain how good of a life we are living.
According to the latest data by the Bureau of Labor Statistics, the average household budget is $60,060 for 2017, a 4.8% increase from 2016 levels. Surely the average household budget in 2021-2022 is even larger once the data comes out.
We can estimate the average household budget is even higher in 2021 due to inflation and our insatiable appetite for consumer. After all, it takes $3 million to be a real millionaire today. We are making more and spending more as we come out of the global pandemic.
Eight of the 10 largest components of household spending increased during 2017. The 12.2% rise in education spending was the largest percentage increase among all major components, followed by a 10% rise in entertainment.
The Average Household Budget Is Huge
For all this talk about Americans being in a poor financial state in retirement, it sure seems like the average American doesn't really worry about the future with this type of household spending.
Take a look at the latest BLS data below.
Average Income: $73,573
An average income of $73,573 is very healthy, especially when you compare it to the average home price in America of roughly $225,000 – $240,000.
So long as the home price-to-income ratio around 3:1, homes are still affordable. Once you have a roof over your head, life is pretty affordable overall.
In some cities around the country, however, the median home price is often 10X or greater the median or average income. For example, the San Francisco median income is $97,000 versus $1,500,000 for the median home price = 15X.
Savvy investors should consider geoarbitraging the valuation differentials in the heartland of America through real estate crowdfunding. Fundrise, my favorite real estate crowdfunding platform, offers a Heartland eREIT and various commercial and multi-family real estate opportunities to invest in for as little as $1,000.
After selling my San Francisco rental home in 2017 for 30X annual rent, I reinvested $550,000 of the proceeds in real estate crowdfunding to earn income more passively. As a new father, I was sick and tired of dealing with tenants and maintenance issues.
Average Food Budget: $7,729
$644 a month on food seems reasonable. With the advent of food delivery apps, it's become much easier to spend more on food.
What's alarming is the growing obesity epidemic in our country that is putting a great strain on our health care system.
According to the Center for Disease Control, about 610,000 people die of heart disease in the United States every year–that's 1 in every 4 deaths. Heart disease is the leading cause of death for both men and women. And obesity is the leading cause of heart disease.
The overweight and obesity epidemic in America is another sign that Americans are living their best lives now. If you don't have money, you simply aren't eating as much. You don't see anywhere close to similar levels of obesity in poorer countries.
Average Housing Budget: $19,884
Spending $1,657 a month on housing seems high given the average house price in America is roughly $225,000 – $240,000. We're talking about spending 8% of the average house price in housing expenses.
With a 5.3% YoY increase in the average housing budget, it's a clear reminder that renting is a losing proposition long term. Renting long term is like shorting the S&P 500 long term – a losing proposition.
Savvy households should at least get neutral inflation by owning their primary residence. To really be long real estate, you must own more than one property.
As a young man, I was enthusiastic about owning physical real estate. But as I've gotten older, I'm all about simplifying life and earning income as passively as possible through real estate crowdfunding and other passive investment opportunities.
Spending $798 a month on transportation is an excessive amount of money for the average American. Americans have a love obsession with cars, which is simply unhealthy.
People who want to achieve financial freedom should follow my 1/10th Rule For Car Buying, which states that you should limit your car purchase to more than 10% of your annual gross income.
The average American earning $73,000 spending $36,000 for the average new car price in 2019 is financial suicide. Instead, the average American should look to spend roughly $7,300 or less.
After all, besides the car purchase price, there's insurance, gas, maintenance, and tickets to deal with. The ideal time to own a car is until the car hits about 10 years old. Then it's time to change for safety.
Health Care Budget: $4,928
Health care cost is one of the largest concerns for all Americans. Although $4,928 a year seems reasonable, largely thanks to employer subisidies, what's concerning is the rate of growth. From 2016 – 2017, the spend rate increased by 6.9% after experiencing a 6.2% annual growth rate in the year prior.
At an annual 6%+ growth rate, we should expect the average health care expenditure to double in just 11-12 years. The only way most Americans will be able to afford their health care is through their employer.
Small business owners get a business deduction, but they have to carry the entire annual premium cost, which averages around $20,000 a year.
The average household budget spent on health care will sadly increase over time. Health care inflation is running closer to 6% a year.
Entertainment Budget: $3,203
The entertainment budget grew 10% year over year, but is quite reasonable at only $267 a month. Americans are spoiled by a variety of low cost entertainment options thanks to the internet.
Computers and mobile phones are more affordable than ever before. Even amazing personal finance content to help you reach financial freedom sooner is free.
The average household budget on entertainment has decreased due to the pandemic in 2020-2021. But it's reviving back up according to the latest credit card spending data.
Personal Insurance and Pensions Budget: $6,353
One of the biggest revelations about the Bureau of Labor Statistics data is that the government categorizes Personal Insurance and Pensions as “savings.”
If the average savings is $6,353 a year, then the average American is saving roughly 8.6% of their average household income.
However, savings is different from cash flow. After tax, the average American household has negative cash flow if they are indeed spending an average $60,060 a year. Therefore, it's no wonder why consumer debt continues to march higher.
Older generations have the luxury of having pensions. But less than 13 percent of the American population now have pensions. Further, Social Security is underfunded by 23 percent. The only way to get Social Security whole is to increase the full retirement age or cut benefits.
All Other Expenditures Budget: $2,010
Something always comes up, so it's good $2,010 is allocated towards miscellaneous expenses.
Americans Are Living The Good Life
What's amazing about the average American household budget is that it still allows Americans to spend $45,756 a year in retirement. You would think that spending $60,060 a year on average while working and saving less than 10% of our income would be worrisome, but the data shows otherwise.
If the average American wants to reach financial independence sooner, they can easily save money by cutting their $9,576 a year in transportation expenses.
Despite all this data, we know there are no guarantees in life. We really shouldn't count on pensions or Social Security to take care of us in retirement. Instead, we should count on ourselves.
Track Your Average Household Budget Closely
The best thing every financially savvy American should do is diligently track their finances. Use a free, award-winning financial tool like Personal Capital to analyze your investments for excessive fees and calculate your retirement cash flow.
Those who track their finances regularly are better able to optimize their finances for a healthier financial future.
I've been using Personal Capital's free tools since 2012, and have been able to increase my net worth by over 5X since. The main thing the tool helped me with was making sure my risk exposure matched my risk tolerance.
There is no rewind button in life. The last thing you want to do is wake up 30 years from now and realize you didn't save and invest enough!
Boost Wealth Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income.
By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate roughly $150,000 a year in passive income.
Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
About the Author: Sam worked in investing banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
The Average Household Budget is a FS original post.