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Graduated in May from school. Student loans are coming due here in January. Bought a new car recently. The added monthly expenses have me concerned that I am budgeting my money correctly. I currently am spending around 45-50% of my monthly (net)income to cover all my expenses and living. The left over is pretty discretionary, but things like eating dinner outside the house and expenses that are abnormal would come out of this.

My question is what percentage is a safe amount to be committing to expenses on a monthly basis?

  • @jeff - If you don't have things like eating out budgeted, I wonder how much you'll have left over after a full year has passed, I doubt it will be 50%. It's only that you've account for the first 50%. – JTP - Apologise to Monica Dec 17 '13 at 22:04
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Are you asking "what does everybody else do/spend"? I think any amount less that 90% is "safe", but if depends on your goals. Saving a "dime of every dollar" is a good rule of thumb for retirement, so 90% is left to spend.

But I believe that is the wrong way to think about it. You have expenses; some are optional and some are not. The percentages aren't the important thing. What is important is that you meet your obligations and meet your goals. Everybody is different, so I don't think you can reasonably your percent of expenses to somebody else.

In setting up your budget, go the simple route. You can always get super detailed later if you want.

INCOME

  • minus EXPECTED REQUIRED EXPENSES (bills and utilities)
  • minus PLANNED REQUIRED SAVINGS (retirement, emergency fund, large goals)
  • minus PLANNED NON-REQUIRED EXPENSES (fun stuff)

As you have extra funds, be sure you have an emergency fund (~6 months of expenses) and a fully funded retirement. Pay off any outstanding debts. If you are so fortunate to have some left over, then revisit the savings amount or become an investor like many people here; or have fun and go on vacations; or buy a nicer car. The point being you will know you can afford it.

If you put detailed categories under those main categories, that will give you a picture of where you spend you money and you can fix that if desire. If it bothers you that you spend 15% of your income on imported classical music, you can adjust that with a habit change.

  • What you said about a percentage makes sense. Although having 90% of my income committed every month would kill me from the anxiety I understand what you are saying. I appreciate the the detailed answer. – Jeff Dec 17 '13 at 16:13
  • @Jeff - My opinion is that percentages are useful for generalizations, such as saving 10% for retirement. But on a personal level, percentages are misleading at best. – MrChrister Dec 17 '13 at 16:26
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Since you already have established a set of expenses, most importantly your rent.

  • Housing

Blair Hodgson DuQuesnay said, “You don’t want to spend more than one-third of your take-home pay on your housing, whether that’s rent or a mortgage. With almost everything else, you can work from there.”

  • Total fixed expenses

She also recommends that your static bills — housing, utilities, and other fixed expenses that recur monthly — don’t take up more than 50% of your budget. If you can keep them even lower than 50%, like, say 40% or 35%, you’ll have even more spending money for everything from food to clothing to savings.

So basically, it is time to start to be worried if you are exceeding half of your budget on your expenses. Forbes has an excellent article on how new grads can plan to budget their money.

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My opinion is that 50% savings is the number to shoot for, and I strive toward that number as often as possible.

10% - savings for retirement

10% - savings for short term emergency fund

25% - payment on mortgage principal

5% - savings for planned big purchases

I overpay the principal so that 25% of my income goes to principal payments, and I separately account for the mortgage interest/home owners insurance as another expense in my budget. Because of this aggressive payment schedule, the house I bought 2 years ago will be payed in full in another 9 years. I own another property outright that I paid down in the same fashion and I collect rent on it as a supplement to my income. I started with a small townhouse that I could easily afford, but now I have a much larger home that I can still easily afford.

The emergency fund doesn't need to be more than 6 months of expenses, which is 3 months of income if your expenses are only 50% of your income. I keep 6 months of expenses liquid and another 12 in a low risk investment. Once you have your emergency fund funded, you can add that percentage to a different category (say 15% to retirement and 10% to planned big purchases), or you can over-fund it. I have had a few catastrophes that have depleted that fund, so I like having the extra 12 months of income available.

I set the last 5% aside for wants that are not regular expenses. If I want a car, I save 5% of my income until I can pay cash for it. I have an infinite number of these wants, so I prioritize them and buy them in order when the cash becomes available.

The reason I use percentages is to keep me focused when my income increases. Instead of spending all the additional money that I could afford to spend each time I get a raise. I instead only increase my expenses to the 50% mark. It was much harder to save 50% when I got my first job out of college, but now I live quite comfortably on that percentage and I could take a large hit to my income before I would need to make significant changes to my lifestyle.

  • BTW the biggest category of my expenses is tax (federal & state income, and payroll) so if I DID lose my job, one of my bigger expenses would disappear. – NL - Apologize to Monica Dec 18 '13 at 18:32
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Debt cripples you, it weighs you down and keeps you from living your life the way you want. Debt prevents you from accomplishing your goals, limits your ability to "Do" what you want, "Have" what you want, and "Be" who you want to be, it constricts your opportunities, and constrains your charity.

As you said,

Graduated in May from school. Student loans are coming due here in January. Bought a new car recently. The added monthly expenses have me concerned that I am budgeting my money correctly.

Awesome! Congratulations. You need to develop a plan to repay the student loans. Buying a (new) car before you have planned you budget may have been premature.

I currently am spending around 45-50% of my monthly (net)income to cover all my expenses and living. The left over is pretty discretionary, but things like eating dinner outside the house and expenses that are abnormal would come out of this. My question is what percentage is a safe amount to be committing to expenses on a monthly basis?

Great! Plan 40-50% for essentials, and decide to spend under 20-30% for lifestyle. Be frugal here and you could allocate 30-40% for financial priorities.

Budget - create a budget divided into three broad categories, control your spending and your life.

  • Essentials (housing, food, utilities including gas, electricity, water, trash, transportation), under 40-50%, try 40%
  • Financial (emergency fund, debt payoff, savings, investments, et al), at least 20-40%, try 40%
  • Lifestyle (cellphone, internet, cable, movies, clothes, shoes, haircuts, restaurants, et al), under 20-30%, try 20%

Goals - a Goal is a dream with a plan. Organize your goals into specific items with timelines, and steps to progress to your goals. You should have three classes of goals, what you want to "Have", what you want to "Do", and who you want to "Be"; Ask yourself, what is important to you.

Then establish a timeline to achieve each goal. You should place specific goals or steps into three time blocks, Near (under 3-6 months), medium (under 12 months), and Long (under 24 months). It is ok to have longer term plans, but establish steps to get to those goals, and place those steps under one of these three timeframes.

Example,

  • Near:
    • Save, increase emergency fund to $2000.
    • Sell expensive car (ditch the payment).
    • (then) Buy a cheaper car for cash.
    • Payoff Visacard/Mastercard debt.
    • Sell bike.
  • Medium:
    • Save, increase emergency fund to $3000.
    • Take guitar lessons.
    • Travel to Florida.
    • Learn to make veggie chili.
    • Payoff $3000 of student loan debt.
  • Long:
    • Payoff additional $6000 of student loan debt.
    • Buy Motorcycle.
    • Buy new laptop.

Good advice I have heard includes keeping housing costs under 25%, keeping vehicle costs under 10%, and paying off debt quickly. Some advise 10-20% for financial priorities, but I prefer 30-40%. If you put 10% toward retirement (for now), save 10-20%, and pay 10-20% toward debt, you should make good progress on your student loans.

  • Thank you for the detailed response. My 45-50% figure is including everything from my current expenses, my student loans, and my car payment. My original plan was to make my minimum payments on student loans and use 100% of my work bonuses(bi-yearly) to pay them down quicker. My car payment is right at double my student loan payment. So I have been considering paying my car off first using my bonus method and then using the money from what would have been car payment to pay towards on a monthly basis on top of the minimum payment. – Jeff Dec 22 '13 at 21:45
  • Consider splitting up your spending into expenses (including transportation), lifestyle, and financial priorities. If you are spending less than 50% on expenses and lifestyle, you could allocate the rest to savings and paying off student loans. I would recommend 30% paying student loans, and 20%+ saving -- this will get you out of debt quickly and save you lots on interest payments on your student loans. – ChuckCottrill Dec 23 '13 at 18:18

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