Who Budgets in America?

By Lindsay Frankel
Inside Subprime: Jan 31, 2020

Most people recognize that sticking to a budget can help them achieve their financial goals, but are U.S. consumers utilizing this healthy financial habit? A 2013 Gallup poll found that only 32 percent of Americans prepare a household budget, but that could change if consumers stick to their 2020 New Year’s resolutions. A survey from the National Endowment for Financial Education revealed that three quarters of Americans plan to make financial goals for 2020, with 43 percent of respondents committed to establishing (and following) a budget.

Why is budgeting important?

59 percent of U.S. adults are living paycheck to paycheck, which means they are unprepared when financial emergencies arise. And the majority (72 percent) of Americans faced an unexpected expense in 2019. When it comes to being financially prepared for setbacks, budgeting is key.

The failure to maintain a budget may be one reason why 39 percent of adults couldn’t manage a $400 unexpected cost without selling items or borrowing money, according to survey data from The Federal Reserve. The only way to save for an emergency is to set spending limits, especially when living on a limited income.

Even consumers who aren’t budgeting agree there are benefits to doing so. In a survey conducted by the Certified Financial Planning Board of Standards, all respondents said the top reason for using a budget is to keep control over one’s finances. Despite this recognition, 59 percent weren’t tracking their spending.

Why aren’t more people budgeting?

The CFP Board survey found that most people don’t understand what a budget entails. 43 percent of survey participants said they were budgeting, but most defined budgeting as tracking their spending. A true budget sets forth spending limits for specific needs in a given time period.

How do budgeting habits vary by age and gender?

Among respondents who resolved to set financial goals for 2020, women were more likely to say they would set a budget than men. 46 percent of women planned to develop and stick to a budget in 2020 as opposed to 39 percent of men.

In addition to gender disparities, there are differences in spending and saving habits between age groups. Unsurprisingly, people under 25 and people over 75 spend the greatest percentage of their income, about 95 percent on average. That’s because they earn significantly less on average than Americans ages 45-54, who spend about 65 percent of their total income. Budgeting is especially important for young Americans and retirees, who have limited incomes and less wiggle room when it comes to spending.

How do budgeting habits vary by income?

Across age groups, people earning higher incomes are significantly more likely to budget. 39 percent of Americans earning more than $75,000 annually said they followed a budget, as opposed to 30 percent of respondents earning between $30,000 and $75,000. 32 percent of respondents earning less than $30,000 said they followed a budget, according to the Gallup poll.

Some people think that they don’t earn enough to establish a budget, or that budgeting isn’t necessary if you’re only purchasing necessities. But it’s just as important for low-income households to establish a budget as it is for higher income households to set spending limits. The best way to build a nest egg is to outline your expenses and allocate your leftover cash to savings or investments.

What does the average American’s budget look like?

The average pre-tax income for U.S. households in 2018 was $78,365, and consumers spent 78 percent of that on average ($61,224), according to the Bureau of Labor Statistics. Here’s a breakdown of how Americans spent their paychecks in 2018.

  • Food: $7,923
  • Housing: $20,091
  • Apparel and services: $1,866
  • Transportation: $9,761
  • Healthcare: $4,968
  • Entertainment: $3,226
  • Personal care products and services: $768
  • Education: $1,407
  • Cash contributions: $1,888
  • Personal insurance and pensions: $7,296
  • Other: $2,030

Given that federal and state taxes eat up a portion of our paychecks, and money should be set aside for retirement, Americans are overspending. Rather than using this as a model budget, Americans should be setting spending limits that allow them to set aside an appropriate amount for emergencies.

How much should Americans be saving?

The average American has $8,863 set aside in a savings account, but this falls short when compared to what most experts recommend. Traditionally, financial experts have suggested keeping three to six months worth of expenses in an emergency fund, but personal finance guru Financial experts typically recommends having enough saved for eight months to one year without income.

To get there, try following the 50/30/20 rule, which suggests that you spend 50 percent of your after-tax income on necessities, put 30 percent towards things you want, and set aside 20 percent in savings. Of course, if you’re already spending 80 percent of your income on meeting your needs, you may have to eliminate spending on non-essentials.

In addition to having an emergency fund, households should be putting 15 percent of their income towards saving for retirement, according to financial services company Fidelity. The rule of thumb is that you should try to set aside an amount equivalent to your starting salary by the time you turn 30. By retirement age (67), the goal should be to have 10 times your starting salary saved for retirement.

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