Taking Charge of Family Finances

How Much Should We Spend?

FE440 (Revised)
Debra Pankow, Family Economics Specialist

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Most families want to be more in control of their household spending. They wonder if what they spend for food or housing or clothing is in line with what others spend.

There is no "right" or "wrong" amount to spend on a given expense area, just as there is no "average" family to compare with your family. Average living expenditures are a composite from many individual families. Your own family's goals, values and stage in its family life cycle greatly affect the way your resources are allocated.

American spending patterns have changed a lot in the last 50 years. Food expenditures used to consume nearly one-third of family income. The federal poverty guidelines were established in 1963 and used the cost of food as the basis for determining poverty thresholds. Poverty thresholds were established at three times the cost of the U.S. Department of Agriculture's economy food plan. Today food expenditures are roughly 12 percent to 14 percent of the family income.

Housing expenditures (rent or house payment) have increased from approximately 13 percent of the household income in 1960 to 34 percent for most household types today. Transportation expenses also have gone up, from 15 percent of the family income in 1960 to almost 18 percent today for many families.

In addition, the amount historically spent for family living varies depending on families' geographic location and lifestyle. Farm families, for example, spend a much greater percentage of their family expenditures on medical care and health insurance than do other families. Rural households accounted for about 8.7 percent of total U.S. consumer units in the 2007 Consumer Expenditure Survey, but this percentage varies greatly by region of the country. In 2007, urban households averaged higher incomes before taxes ($64,285) than did rural households ($50,497) and had higher levels of total expenditures.

Regardless, taking a look at the average figures for family living that are available can be very beneficial. Comparing your spending to the average can help you determine reasonable limits for your family living expenses and what areas to look at if some trimming is necessary.

All U.S./Midwest/Farm Differences In Household Expenditures

Although farm and ranch family living levels have risen during the past decade, important differences exist among urban, rural and farm households and their expenditures. Urban consumers pay a greater proportion of their income in taxes. Urban households have slightly fewer members and are headed by people considerably younger than their rural counterparts. Rural consumers own more vehicles and are more likely to own their own homes.

In 2007, U.S. households overall spent a higher portion of their incomes on transportation and housing. The farm family sample had higher expenditures for housing and health care. Just more than 22 percent of U.S. households are considered rural, while more than 27 percent of households in the Midwest are considered rural. Very little data exists to address the very specific situation of the farm family. Farm families, although similar to rural households, have their own very different situation.

Like many families, most farm families do not know exactly what they spend for family living expenses. Income is both uncertain and irregular, and many families do not keep a separate household checking account. In addition, the amount spent on family living is usually small when compared with that spent in the farm business, so family living expenditures seem insignificant. Standard budget guidelines or budget breakdowns of urban or rural nonfarm families usually do not apply to farm families.

The North Dakota Farm Business Management Education program has one of the few sources of data for North Dakota farm family living spending. Families in the program prepare detailed records of farm income and expense. The number of families participating in the program in the past 25 years that also have kept detailed family expense records has ranged from 93 to 343 families. Separate averages are maintained for the 20 percent least profitable farms/ranches, the 20 percent most profitable and the total families participating.

The following pie charts compare family living expenditures for consumer units (families, households or individuals) with the U.S. average (2007), Midwest average and 2007 average for the North Dakota Adult Farm Business Management Education program.

Your Own Unique Situation

Note that the guidelines are based on take-home pay. That's the pay you actually bring home or, in the case of the farm family, the amount available for family living expenses. Most wage earners will have deductions as well as taxes taken out of their paychecks. When looking at a budget, considering just the money you have direct control over is safest. Often considerable confusion occurs when a budget plan is based on gross pay.

To Find Out Where You Stand

Write down your take-home pay on the "reasonable limits" chart. Using records such as receipts, your checkbook register, credit card statements, etc., jot down what your family usually spends each month for food, housing and the other categories listed. Finally, figure out the percentage of take-home pay you spend for each category. To do this, divide the amount in each category by the total amount of take-home pay and multiply by 100.

For example, consider a family with a take-home pay of $3,000 per month. This family spent $600 for food (at home and away), so the percentage spent for food is 20 percent. ($600 divided by $3,000 = .20 x 100 = 20%).

Now compare your percentages with the typical household expenditures for the family type your family most closely resembles -- overall U.S., Midwest or farm (from Table 1). You will have expense areas where you differ greatly from the guidelines.

Why Do We Spend Different Amounts?

All families are different and have different spending patterns.

How you compare to all U.S., Midwest or farm family guidelines (or recent averages) will depend on several things. Let's consider some of them. The amount and source of your income is important in determining how much of your paycheck goes for certain things. As income goes up, families spend a smaller portion of it on essentials, such as food and medical care, but may spend a larger portion for entertainment, clothing or personal items. Families who are self-employed, such as farmers, do not receive the employee-sponsored benefits, such as medical care, that many other families receive.

Depending on what your job is and where it is, you may spend more for clothing, education and transportation than someone else.

Where you live also determines how much of your budget goes for certain items. Someone who lives in a city with public transportation may not need to spend as much on transportation as a rural resident. For the farm family, the percent of family income allocated for housing may seem extremely low. That's because the house investment typically is considered to be an integral part of the farm business. Your family's size, stage of development and number of wage earners help determine how the family paycheck pie is sliced. Employed families with small children may spend as much as 10 percent to 20 percent of the family take-home pay for child care. Elder care is a big portion of other family budgets.

Families have different spending priorities because they think different things are important. The family who thinks giving to the church or giving elaborate gifts to others is important will spend more for gifts and contributions than the family who places a low priority on these items.

The amount spent for education varies widely from family to family, depending on the age of children, whether children attend public or private schools and the priority placed on education. All families are different. They all have different values. They spend money differently because of their values.

Any Unusual Circumstances?

Your family may have unusual circumstances that can make certain expense items very different from the average guidelines. Things such as high medical expenses for a family member, children in college or a temporary job layoff are just a few examples.

You may find that you are spending 100 percent of your take-home pay before you are completely down the list. That means nothing is left for the rest of the categories, for emergency or other types of savings.

This is a warning signal for you to take a serious look at your money situation. More important than knowing how your spending compares to that of other families is that you know where your money is going and why. If you don't know, keep track for a month or so. Then sit down together as a family and look at your records. The longer the time period for which you have records, the more accurate this picture of your family's spending will be.

What To Do If You Have Problems

Be sure all family members know the situation, agree something has to be done and are willing to cooperate as you attempt to workout your financial problems.

Look at the records you have of your family's spending. Decide what can be cut, at least temporarily, until the present financial crisis is over.

Stop buying on credit until you get all your present credit debts paid. Notify creditors and try to arrange a payment schedule you can stick to.

Consider ways to bring additional income into your household. Teenagers can do odd jobs around the neighborhood. Sometimes an additional job may be necessary until you are back on your feet.

If you need outside help, discuss your family's financial situation with a consumer credit counselor, a member of the clergy, your family banker, an attorney or a representative of a social service agency trained to help families with financial problems. If that professional does not have a financial management background, chances are he or she can refer you to someone in your area who can help.

Your county office of the NDSU Extension Service also has publications, videotapes and computer programs that can help you get your finances on track.

And finally, visit eXtension's personal finance resources on the Internet (www.extension.org) for timely, unbiased and research-based information to help you make wise financial decisions.

Other publications in the "Taking Charge of Family Finances" series:

HE-452, "Managing Farm Family Finances"
HE-453, "Farm Family Living Trends in North Dakota"

Sources:
2007 Consumer Expenditure Survey, Bureau of Labor Statistics, U.S. Department of Labor
North Dakota Farm Business Management Education Program, 2007 Annual Report

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For more information on this and other topics, see: www.ag.ndsu.edu

FE440 (Revised), June 2009