Ultimately, you shouldn't worry if your monthly expenditures don't end up lining up with the averages listed above. On the one hand, the cost of living can vary widely, depending on where in the country you live. On the other, your budget should be based on your priorities, and everyone's priorities are going to be a little bit different.
For example, one person may choose to prioritize entertainment spending over clothing and services while someone else may prefer it the other way around.
How to budget for household expenses
Now that you've seen what the typical American spends per month, the next piece of the puzzle is learning how to make a budget of your own. For the most part, this happens in three steps. We'll take you through the process from start to finish below:
Track your expenses
The first step to creating a budget is tracking your expenses, or taking an in-depth look at where your money is currently going each month. After all, a big part of budgeting is allocating realistic amounts of money into spending categories, and that will be hard to do if you don't have a handle on how your money is currently spent.
There are a few ways you can do this, including:
- Going the old-fashioned route and collecting receipts.
- Looking through your account statements.
- Using an expense-tracking app.
Whichever method you choose, you'll want to make an effort to track your spending for two to three months in order to get a sense of what you spend, on average.
Pick a budgeting method
Next, you'll want to pick the budgeting method that best suits your needs. While there are a ton of variations out there, most are based off of one of four core methods. Here they are for your consideration:
The 50/30/20 budget
The 50/30/20 budgeting method is fairly straightforward and simpler than some of the other methods on this list. It involves sorting your budget into three separate categories as follows:
- Your needs (50%): This section makes up 50% of your budget and includes all of your necessities, such as housing and utilities, groceries, insurances, and the minimum monthly payments on any loans.
- Your wants (30%): In this case, your discretionary spending makes up 30% of your budget. Generally, these items are nonessential extras that make up the "fun" part of your budget. They can include things like monthly subscriptions, dining out, travel, and other entertainment purchases.
- Savings and debt (20%): With this method, savings and debt (any payments you make over your minimum payment) make up the final 20% of your budget. This could mean things like paying down your credit card debt or your student loans or saving for retirement or another personal goal.
The pay-yourself-first budget
The pay-yourself-first method is also fairly simple, and it prioritizes saving. With this method, the first thing you do is decide how much you can afford to save each month. Then, you set up an automatic transfer to move that amount into a savings account as soon as you get paid each month.
Once that's done, you make do with whatever is leftover, both for your necessities and your discretionary spending. With that in mind, while this method will ensure that you save, you'll absolutely want to make sure you leave enough money in your account to cover your bills.
The envelope system
The envelope system gets a little more complicated. Here, you decide beforehand how much of your monthly budget you would like to allocate to each spending category. You then withdraw the corresponding amount of cash for each spending category and put it into a separate envelope.
Throughout the month, whenever you need to spend money, you take it out of the envelope for the appropriate spending category. For example, if you needed to go grocery shopping, you would take the money out of the envelope for your food spending category.
Once the money in each envelope is gone, that's the end of spending in that category for the month, unless you want to borrow from another envelope. Be careful about borrowing money too often, though. It's an easy way to run out of money before the end of the month.
The zero-based budget
Finally, a zero-based budget works similarly to the envelope system, except that you don't have to use physical envelopes and cash. To do this, you take your income and allocate it into different spending categories until there is nothing left.
Since this method relies so closely on accurately estimating your spending categories, it's a good choice for those who are experienced budgeters and who are very familiar with what they spend each month.
Create your budget
Once you've chosen the method that you think will work best for you, the final step is to sit down and create your budget. While this process may take a little time, it's important to look back at your expenses over the last few months and use them to allocate your funds wherever you feel they are most appropriate.
Remember, budgets can always be adjusted as you go along. In fact, the initial budget that you make will probably serve as an estimate. After doing your best to stick to it for a while, it's a good idea to tweak it as needed until you end up with a plan that closely mirrors your spending habits.
How to save money on household expenses
Lastly, no matter how much income you have, it's never a bad idea to try and save money on your household expenses. To that end, we've laid out a few practical tips that you can use to put some extra change back in your pocket.
Make sure your subscriptions are up-to-date
It may sound obvious, but monthly subscriptions have a way of eating into your budget -- especially if you're not using them. After you've tracked your spending for a while, go through your receipts and account statements to see if there's anything worth canceling. If you have multiple subscriptions that perform the same function -- like Netflix (NASDAQ: NFLX) and Hulu -- consider cutting back to just one.
Start planning your meals
According to the Bureau of Labor Statistics, the typical American spends $660 per month on food costs, between groceries and going out to eat. That's a big expenditure. One way to cut back on that cost is by making an effort to plan your meals ahead of time. On the one hand, it will help you cut back on impulse buying at the grocery store, and on the other, you may spend less money eating on the go.
Rethink how you shop
Along those same lines, it may make sense to be more deliberate about how you shop. If you haven't been doing so already, you may want to put more focus on shopping sales, clipping coupons, and buying in bulk. Whenever possible, buying secondhand is also an easy way to keep items low-cost.
The bottom line
Certain living expenses may be unavoidable, but that doesn't mean your expenses have to rule your life. In fact, with a little planning and preparation, it's entirely possible to come up with a monthly budget that suits your needs. When combined with taking steps to cut excess costs, effective budgeting is one of the best things you can do to start feeling in control of your finances.