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January 15, 2022 — 32 min read

The complete guide to managing and optimizing your expenses

Josh Pigford

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Josh Pigford

If someone asked you the question: “How much money did you make last month?”  most of us would be able to answer correctly with a reasonable degree of certainty. However, if the question was flipped and someone asked you how much money you spent last month , many of us would be left clueless.

A survey taken by Gallop shows that only 33% of Americans prepare a detailed household budget, and those households that have incomes of more than $75,000 are more likely (39%) to prepare budgets than their lower-income counterparts.

Why is tracking your expenses so important?

The easiest road to bankruptcy is by not paying attention to your expenses.

Tracking and understanding your expenses is one of the main pillars of a sound financial plan. By doing this, you can visualize how your income is distributed among various aspects of your life and learn to prioritize your spending towards where it's required most.

This can be as simple as paying off high-interest debt early, allocating income towards investments at the beginning of the month instead of the end as that helps you invest more and spend less on discretionary expenses, and so on. Tracking and optimizing your spending and expenses can help you locate areas of your life in which you are perhaps spending a bit exorbitantly and reallocating that capital towards more productive financial habits like building an emergency fund or investing it into the equity or bond markets.

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If you'd like to dive deeper into the topic of optimizing your expenses, tune in to the Ask Maybe podcast episode on this very topic.

What are your major expenses, and how can you reduce + optimize them?

Beware of little expenses. A small leak will sink a great ship.

Benjamin Franklin

Average annual costs by expenditure c...

All data in the chart above is based on Consumer Expenditure data from the Bureau of Labor Statistics for 2020. Note that taxes and debt payments + savings data have not been included in the newest report (September 2021), so these figures are based on 2018 data.

Let's take a look into each of these categories and see how we can optimize spending, thereby reducing expenses and improving the rate of savings. Your spending might be tilted towards other expenses, namely, childcare, college tuition, and healthcare depending on your life circumstances.

So, based on your situation, it would be preferable to focus on optimizing spending and expenses in those categories that you spend the highest percentage of your income on.

Housing

The average U.S. household spends approximately $21,409 per year on housing.

Direct rent and mortgage payments

This expenditure component includes rent, mortgage, housing insurance, and property taxes.

About two-thirds of U.S. households own their home, and more than 50% of homeowners currently have a mortgage. The average U.S. homeowner spends about $10,778 per year (~$958 a month) on mortgage interest, property taxes, and other expenses such as maintenance, repairs, and homeowners insurance.

The remaining one-third of Americans who rent pay slightly less to the tune of $10,478 per year (~$930 a month) for their rent, maintenance costs, and renters insurance.

Average annual cost to rent vs buy.png

When you're having trouble deciding whether to rent or buy, there are a few guidelines you can follow to help you make a decision.

  1. Limit purchase to 2-2.5X gross income. With the average income being $84,352, this would be about $210,880.

  2. Limit monthly housing costs (mortgage/rent, insurance, taxes, HOA, etc.) to 25% of bring-home income. With the average US household income being $84,352 and taxes at $10,811, according to this rule, your monthly housing costs should be about $1,532 ($18,384 annually).

  3. Limit total monthly housing costs to 28-36% of gross income based on whether you want to be aggressive or conservative. According to this rule, taking the average household income as $84,352, your monthly housing costs should be about $1,968 to $2530 ($23,618 to $30366 annually).

How you can reduce expenses on mortgages

Mortgage Expense Optimization.png

If you paid off just one extra monthly mortgage payment a year, you could save $12,217 in interest charges.

Monthly payments and total interest p...

How you can reduce expenses on rent

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Utilities and other household operational expenses

The average American household spends about $8,806 on utilities and other household operational expenses and equipment. The most significant expenses are monthly recurring payments for electricity, heating and gas, water/sewer/septic, trash collection, and phone service (including cell phones).

Also, a little over 70% of Americans spend money on household services like babysitting or elder care, house cleaning or lawn mowing, laundry and dry cleaning, pest control, and home security systems. This part of expenses comes to about $1,465 on average (or $122 per month).

The last significant expense under this category is furnishings and equipment. This includes purchasing new household electronic appliances from refrigerators, computers, and air-conditioners to furniture like a new dining table and chairs to cooking-related purchases like barbeques and ovens and finally low-cost purchases such as curtains, drapes, towels, etc.

Household Expenses as a - of Overall ...

The average US household spends about 14% of its household budget on utilities and other operational expenses. A further 21% of their budget on rent or mortgage brings the combined total expenditure on housing expenses to a whopping 35% or $21,409 per year. This means that this expenditure category should be a significant focus of trying to optimize spending and reduce expenses as minor tweaks can significantly reduce expenses.

How you can reduce household expenses

Utilities and other household operati...

Transportation

Transportation is the second-largest category of spending for the average US household. It accounts for a huge 16% of household expenditures!

Spending on transportation is in the tune of $9,825 annually ($820/month). This includes all costs related to transportation including purchases of vehicles, gasoline, oil changes, and other vehicular expenses such as car insurance, and money spent on traveling by public transportation or rideshares.

Distribution of Transportation Expens...

A rule of thumb to keep in mind when purchasing a car to see if you can afford it is the 20/4/10 rule.

For the average US household earning $84,352 a year before taxes, if you want to purchase a car worth $45,000 you need to put a down payment of $9,000 (20%), pay the remaining amount within the next 4 years, and limit your monthly transportation expenses to less than $702 ($8,435 annually).

How you can optimize and save on transportation expenses

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Average Annual Cost of Transportation...

Taxes

After household expenditure, the next biggest expense for the average American is taxes. The average US household pays about $7,432 a year in personal taxes, not including property taxes or sales taxes. A huge part of this amount is in the form of Federal Income taxes. Tax accounts for 12% of a household’s yearly expenditure.

How you can optimize and save on tax

Tax Saving and Optimization.png

Food

Almost 10% of the yearly income of the average American household gets spent on food. The average monthly expenditure on food is $610 per month ($7,316 per year). About 33% of that expenditure is spent on food consumed outside our homes such as at restaurants, fast food joints, and when we’re traveling/on vacation. The remaining 67% is spent on food eaten at home.

However, these percentages fluctuate a lot based on incomes and higher-income households (>$70,000/year) spend almost 3 times on food when compared to the lowest-income households (<$15,000/year). The higher-income households also eat out more often (45% of the time) than lower-income households (~33% of the time).

However, based on 2020 data, expenditures on food away from home declined for all income groups. Declines in food away from home expenditures ranged from 27.8 percent for the second income quintile to 37.9 percent for the lowest income quintile.

Expenditure on Food Eaten at Home and...

How you can optimize your food budget

Food Expense Optimization.png

- of food consumed vs food wasted.png

Social security contributions, personal insurance, and pensions

The typical US Household has an expenditure of about $7,246 annually (~$603/month) to safeguard its dependents from poverty in old age or unfortunate circumstances like disability and death.

The major expense in this category, which is paid by 77% of households, goes towards social security contributions. The average amount paid towards social security is $7,275, which may cover one or more workers.

Also, a little more than 25% of US households have either  life insurance or other personal insurance , at an average cost of about $486 annually (~$41/month). As social security is a huge part of overall spending in this category, that is what we’ll be focusing on.

$ spent by the average US household o...

How you can optimize your social security contributions

Social security contributions, person...

Debt payments and savings

About 8% of the annual budget of the average US household goes towards paying off debt and increasing savings and sometimes a combination of both when it comes down to mortgage payments. The goal in this particular category of expenditure would be to pay off debt as soon as possible (starting with high-interest debt), increase the savings component and make advanced mortgage payments to reduce interest payments.

How you can optimize and pay off debt faster

Debt payments and savings optimizati...

Healthcare

While expenditure as a percentage of the overall budget has reduced in areas such as apparel, fashion, and personal care due to the rise of cheap fashion, cheaper clothing, and personal products, healthcare costs in the US have been on the rise. The average US household spends about $5,177 annually on healthcare.

Also, healthcare costs have risen from 6% of the household budget in 2013 (the most recent year for which this data is available from the federal Consumer Expenditure Survey) to almost 8.5% in 2020 based on the Bureau of Labor Statistics.

Healthcare Expenditure by Year.png

In 2013, about 79% of households had healthcare expenses and an average of $4,365 was paid out by them in the year 2013, including  health insurance premiums  and  out-of-pocket costs  for doctors, prescriptions, and medical supplies.

The Affordable Care Act says that health insurance is affordable if premiums cost no more than 9.5% of a household’s modified adjusted gross income. When premiums exceed that level, individuals and families start to become eligible for subsidies if they purchase insurance on the federal or a state health insurance exchange.

How you can optimize healthcare-related costs

Healthcare Expense Optimization.png

Key takeaways

Finally, when it comes to reducing and optimizing your expenditure, it comes down to a few basic steps.

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