Feeling Poor Despite Good Earnings

The following is a guest post from The Financial Journeyman.

Do you earn a high salary or a high combined high household income and feel like you cannot get ahead? The average household income in 2017 was $59,000 for Americans. There are many households who earn $150,000, $250,000, or much more and feel like they cannot get ahead of their spending habits.

When I hear about these households, one thing comes to mind. They do not know how to budget. The salary amount that a family earns is only part of the equation. Without having a well-planned budget as part of your financial plan, it does not matter if your household income exceeds $1,000,000.

Earnings are finite. If you spend what you earn, you will always feel poor. If you spend more than you earn, you will be poor.

Like with most topics in personal finance, there is a solution. The solution is simple, but it might not be easy. It is not easy because it will require a person to make changes to how they budget and spend. When setting up a budget, there are a few general guidelines to follow as to how much you should be spending per category.

To keep it simple, let’s examine how a household should budget a net annual income of $100,000 per year (after taxes). That would come out to $8,333 per month.

Below are some budgeting guidelines to break the feeling of not being able to get ahead:

Housing

Housing costs should not exceed 25% of your budget. That comes out to 2,083 per month. That does not mean you can take out a mortgage where the payments equal $2,083 per month. This amount must cover all your housing expenses. This amount needs to cover taxes, insurance, and miscellaneous expenses.

For those who rent, the same percentage applies. 25% needs to cover rent, renter’s insurance, deposits, or any other expenses. Rent can be almost as expensive as a mortgage in desirable neighbors. The one break that renters do get is that renters insurance is far less expensive than home owners insurance.

Housing is the largest percentage category in this template. For most people, it is normally their largest expense. If you are exceeding 25%, you might have bought too much house or are living in a neighborhood that is beyond your means. To fix this, the best option is to downsize to a home that is more suited for your earnings.

Transportation

Transportation costs should not exceed 11% of your annual salary. That comes out to $916 per month. If you live in an urban area this percentage is for public transportation. If you own one or more cars, this amount needs to cover car payments, fuel, insurance, and repairs.

Food

Your food budget should not exceed 14% of your budget. That would allow you to spend $1,166 per month on food. That is a generous amount. Even with a family of four, that amount can be reduced to $800 per month. Look for coupons. Eat out less. Use coupons when you do go to a restaurant. Buy your groceries at Aldi or other discount stores. There are plenty of ways to save money in this category.

Entertainment

Entertainment is a want and not a need. It should be capped at 5% of your budget. That would allow you to spend $416 per month on entertainment. This includes TV, internet, movies, books, ball games, nights out with friends. There are many great ways to maximize your entertainment budget. Cut the cable cord and use streaming sources. Rent books from the public library. Watch the game at home instead of paying for high price tickets. Have pot-luck dinners with friends instead of going out to eat at fancy restaurants. That 5% can be stretched a long way and provide you with a tremendous amount of fun if you manage it correctly.

Savings and Investing

Your savings rate should be at least 15% of your budget. You might think this rate is high, but this is how much you need to save if you plan on being able to have a decent quality of life in retirement and to be financially independent. 15% would equal $1,249 per month. First, create an emergency fund with 3-6 months’ worth of expenses. While you are building up your emergency fund, be sure to invest the required amount in your employer’s retirement plan to capture the matching contributions. After you have your emergency fund established, contribute this allocation of your budget to your retirement accounts (401K/IRA).

Healthcare

Healthcare costs can range between 5-10% of your household budget. That would equal $416 at 5% or $832 at 10%. The difference between 5% and 10% would be the size of your household. If you have children and are on a family plan, it would be closer to 10%. If you are in the 5% range, consider allocating the other 5% into a Health Savings Account (HAS) for future healthcare costs.

Everything Else

You have 20% left. Make it count. This is to be used to cover utilities, personal expenses, phone, charity, consumer debt, vacation fund, education fund, and whatever else you need to pay for. The good news is that you are left with $1,666 to cover these other expenses. Try to get creative and get the most for your money. Shop around for the lowest cost utilities provider as well as reducing consumption. Cut coupons and look for sales on personal items. Charity can be money, but you can also volunteer your time. Pay off consumer debt. Practice travel hacking and vacation for free. You already pay high taxes, so you might as well take advantage of the public education system. Get creative and do more with less. With some effort, you can spend far less than 20% in this category.

Conclusion

By having a budget, you know how much you should be spending and saving. Without a budget, it is easy to spend more than you earn, not have adequate savings, and fall into debt. If that is your current situation, it is easy to empathize with your feelings of not being able to get ahead even though you earn an above average salary.

The above template is a good place to start. Here is how to use it. Take all your spending and bills from last month. Add them to the categories that best matches the expenses. Calculate your household net income for the month. Measure what your percentages are compared to what is recommended. Once you see where your money is being spent, it is much easier to optimize your budget.

Every household has different and unique situations. If you find that your percentages are way out of line with what is suggested, don’t panic or judge yourself harshly. It might take one year or longer to get your budget optimized to reflect the suggested percentages.

When dealing in percentages, you can track progress. As you start adjusting your budget, track the improvements you are making. A positive increase in savings or reducing an expense by 1% is a step in the right direction. This is not about being perfect. It is about right sizing your life to fit your income.

 

Comments

[Laurie@ThreeYear]

Thanks for this timely reminder of recommended spending percentages, FullTimeFinance! I just went back and did an analysis of our spending percentages for 2017 using your guidelines and was happy to see that we were under in every category. They're good guidelines to keep in mind.

[Laurie@ThreeYear]

I meant to say Financial Journeyman! Typing too fast! Sorry about that!

[Marty]

Great read. Very helpful and if followed, as we are doing, will provide a comfortable future.

[Terry]

I think 5 to 10% for healthcare is very conservative but at least you get some type of number for it. Healthcare is not easy to control.