Regardless of the state of the economy, the average household budget has standard expenses that take up certain percentages of income. The challenge is to keep those expenses below the level of income earned.
Average Budget Size
According to a Department of Labor survey in 2009, the average American household contains 2.5 people and takes in $62,857 before taxes per year, with an annual expenditure of $49,067.
Sources of Income
The vast majority of U.S. households make their money through paychecks that they earn as wage earners. Some of these are salaried workers, while others are paid by the hour. Other sources of income in U.S. households include pension and disability checks, investment returns, bonuses and income made by those who are self-employed.
According to the Department of Labor survey, the largest single expense in American households is housing, which comprises approximately 34 percent of total spending, when shelter, utilities, housekeeping supplies and furnishings are all included. The second largest expense is transportation, at just under 16 percent, a figure that includes vehicle purchase and payments, fuel, registration, insurance and air travel. Food, both consumed at home and away, accounted for almost 13 percent, while money for insurance and pension plans was a little over 11 percent. On average, health care consumes a little over 6 percent of an American's household budget. Entertainment expenses came to about 5.5 percent and apparel and services to 3.5 percent, with 10.5 percent going for "everything else."
The challenge presented to most people is to make their income exceed their expenses. Many people fall into the trap of borrowing in order to afford things in the short term, a practice that can lead to financial difficulty in the long term as debts pile up. Credit card debt in particular, with as much as 18 percent in interest, can very quickly undermine a household budget. An unexpected layoff can decimate a budget, as the terminated person relies on unemployment benefits while trying to find suitable replacement employment. Inflation and increases in the price of necessities such as food and rent can also present challenges to people with a tight budget.
Benefits of Sound Budgeting
Those who keep spending levels within the limits of income benefit in many ways. They are subject to lower levels of stress regarding money and they are in possession of surplus money that can be used to pay down standing debts or to invest in long-term asset growth plans. In the same way that the problem of outspending an income can grow upon itself in a vicious circle, amassing assets in investments and equity can pull a household in the other direction, toward financial security.
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