Thursday, July 2, 2009

How the Average American Spends Their Money

For a project this year, my students need to develop a financial plan for their working years and retirement. This includes a projected household budget during their working and retired years, and requires them to predict what percent of their income they will spend on food, transportation, and the like. I did not know these things myself.

To calculate these numbers, I went to the Bureau of Labor Statistics and found their consumer expenditure surveys, which describe the income and how much money was spent in various categories for a large number of Americans. The raw numbers are biased because the respondents obviously did not understand how much they paid in taxes (they reported a much lower number than is possible). Consequently, I calculated the relative amount consumers spent within each category without accounting for taxes, and used these percentages to describe spending patters as a percentage of disposable income. The results are below.

These numbers are a good starting point, from which students can set values more consistent with their preferences.  Students will certainly want to change these values for retirement years.  By the time you retire your home mortgage should be paid, leaving your housing expenses only including utilities and taxes, implying the percent of income spent on housing should decline considerably.  There should be no life insurance in retirement, because that insurance protects your family against an early death.  And of course, in retirement, there should be zero dollars set aside for retirement, and I would suspect your out-of-pocket health expenses to be higher.

How Disposable Income Is Spent
Food at home 7.00%
Food away from home 5.70%
Housing 33.00%
Clothing 5.00%
Transportation 18.00%
Health Care (out of pocket) 5.70%
Entertainment 5.00%
Life Insurance 2.00%
Retirement 1.00%
Other Savings (e.g. children) 2.00%
Charity / Church 0.50%
Other 15.10%