What Percentage of Income Should Be Committed to Bills?

With a limited income, it is difficult to commit a specific percentage of your earnings toward bills and expect to have something left over. In many households, bills exceed the income, creating a budgeting challenge. Obviously, a household with a substantial income has an easier time earmarking a specific amount toward bills, and often has funds left over for savings, entertainment and vacations.

In 2007, the average American family spent 34.1 percent of their income on housing, according to a report published on the North Dakota State University website. This average family spent 12.4 percent of their income on food, 17.6 percent on transportation, 5.7 percent on health care, 3.8 percent on apparel and services, 5.4 percent on entertainment, 10.7 percent on pension and insurance and 10.3 percent on miscellaneous expenses. These numbers don’t reflect what percentage you should spend on specific items, but what the average American family spent during this period, according to the study.

When preparing a household budget, distinguish your mortgage payment from your other obligations. The U.S. Department of Housing and Urban Development recommends the monthly housing mortgage bill be no more than 29 percent of your gross monthly income before taxes. The agency recommends that your mortgage plus all non-housing debt be no more than 41 percent of your income.

Not all bills are necessary. Divide your bills into two categories, non-discretionary and discretionary, according to “Funding Your Retirement: A Survival Guide” by Max Newnham. Non-discretionary bills include essentials, such as housing, utilities, insurance, transportation and food. Discretionary bills include non-essentials, such as gifts, vacation and entertainment expenses.

In John Ventura and Mary Reed’s “Managing Debt For Dummies,” they break down the recommended percentage of income to spend by bill type, as opposed to overall bills. For housing, they suggest 25 percent, or 35 percent if you consider homeowner’s insurance, property tax, repairs and maintenance on the property. They recommend no more than 10 percent for consumer debt, such as credit cards and medical expenses, 15 percent for utilities, 15 percent for transportation, 10 percent for savings, and 25 percent for other expenses, such as food, clothing, medical insurance and entertainment. These percentages are of net income, as opposed to gross income. Net income, or take-home pay, is income after taxes and deductions.