Taking Inventory of Your Personal Finances: How Much of Your Paycheck Should You Budget for Bills
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Whether you get paid an hourly wage or a monthly salary, at the end of the pay cycle, chances are that your paycheck is less than your earnings. Your employer is typically required by law to withhold a percentage of your paycheck for income taxes, Social Security and Medicare. You might have additional withholding for retirement contributions or health insurance. The federal tax system is pay-as-you-go, so even if you are self-employed you'll have to file quarterly tax reports. The bottom line is, not all of your earnings are available to pay your living expenses.
How much of your paycheck should go for rent depends in part on how much you earn and where you live. Different financial advisers recommend different limits for your housing expenses. American Consumer Credit Counseling organization advocates that 35 percent of your gross income should go toward your housing and debt service. Using that figure, if you earn $3,000 per month your spending for housing should be in the range of $900 to $1,050. Not all of that money should go toward your rent, though. Housing costs also include such expenses as your utilities, maintenance and renter's insurance.
For some expenses, you have very little control -- if there's a big hole in your roof, you need to repair it. You have more control over most expenses, though. For example, you do have to eat but you don't have to eat at an expensive restaurant, so you have some control over how much you spend on food. You probably need transportation to get to and from work, but you have a choice between going into debt for a fancy new sports car or buying a gas-efficient used car. The amount of debt you incur for a vehicle, student loans, credit cards and even medical expenses can pile up if you're not careful. American Consumer Credit Counseling advocates limiting your debt service payments to no more than 5 percent of your gross income. For a $3,000 monthly income that works out to around $150 per month.
Savings and Investments
The key to financial prosperity is paying yourself first. This can be tough when you've got so many other financial obligations. But just consider; every time you make a deposit into an interest-bearing savings account, you're giving yourself a raise. American Consumer Credit Counseling suggests saving and investing 20 percent of your paycheck. If you earn $3,000 per month you should be socking away $450 to $600. "Saving can be tough," acknowledges Certified Public Accountant, Mark Noel. "When you get your paycheck you might be tempted to pay all your other bills first and end up with nothing left to save. Consider having a portion of your paycheck direct deposited into your savings account where it is out of sight and out of mind."
Your savings, housing and debt service expenses will likely eat up between 50 and 60 percent of your paycheck, and you'll probably need another 15 to 25 percent for taxes and other withholdings. That gives you between 15 and 35 percent of your paycheck to go toward your other living expenses, such as groceries, gasoline, entertainment, clothing and insurance. "Not everyone's budget will fall neatly into the ideal percent category," say Jana Castanon, a community outreach coordinator for Apprisen in Columbus, Ohio. "At lower income levels, you'll likely spend a larger amount of your paycheck on necessities, such as rent and groceries. At higher income levels you might find yourself spending more on taxes, but also having more available to save and invest. Either way, keeping track of your income and expenses will help you establish a budget that works for your financial situation."