Common expense-to-income ratios
Experts advise that personal or family expenditure should lay between 50-70% of income. This ratio changes with economic conditions and lifestyle. For instance, a U.S. middle-class family earning $75,000 per year should spend between $37,500 and $52,500 each year. The 50/30/20 rule is commonly applied to better budget finances.
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50% for essential expenses: In an example with an annual income of $75,000 — roughly $3,125 per month should go towards housing, food, transportation, utilities, and other essentials. If housing is 33% of total expenditures, you should spend $24,750 per year on housing, which equates to approximately $2,062/month.
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30% for non-essential expenses: Entertainment, dining out, and shopping should not exceed $22,500 annually (30%), or about $1,875 per month. This allows a family to allocate $600 for entertainment, $500 for dining out, and around $775 for other non-essential categories per month.
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20% for savings and investments: A family with a yearly income of $75,000 should set aside at least $15,000 in savings or investments, including emergency funds and retirement accounts. Monthly, this translates to about $1,250 being deposited into savings or investments.
Data-supported ratio recommendations
In 2022, the average household spending, based on data from the U.S. Bureau of Labor Statistics, was $57,311. Housing remained the top cost at 33% of income—an estimated average of $1,576/month or $18,912/year. Transportation took up 16% of spending, about $9,170 yearly, or $764 per month. Food accounted for 12% of spending, totaling approximately $6,877 annually or $573 monthly. The takeaway is that a reasonable expense ratio should meet basic living needs and prevent high housing costs from reducing savings capacity.
The International Monetary Fund (IMF) recommends a household savings rate of 15-20%. If your annual income is $75,000, you should save at least $11,250 to $15,000 each year. IMF research indicates that increased household savings can better enable individuals or families to handle unforeseen expenses, such as job loss, during periods of economic insecurity.
How to adjust expense ratios to different financial situations
While the 50/30/20 rule is commonly applied, it should be adapted to specific financial situations, which may vary according to income levels. A Harvard University study finds that a household earning less than $40,000 per year may spend 60% (or more) of its income on needs alone, making it difficult to save at higher levels.
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Low-income earners: If you earn $40,000 per year, basic shelter and food may cost around $24,000, or $2,000 per month. In this case, the savings rate may need to be reduced to 10%, with $4,000 saved annually to maintain an acceptable standard of living.
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High-income earners: Households earning $100,000 or more can increase their savings rate to 30% or higher. For instance, if your annual income is $120,000, you could save or invest $36,000 annually, or $3,000 per month, which would help accelerate wealth accumulation and prepare for economic instability.
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High-debt households: According to the U.S. Consumer Financial Protection Bureau (CFPB), the average credit card interest rate stands at 16%. A family with $20,000 in high-interest credit card debt could pay as much as $3,200 annually in interest. Therefore, you should prioritize reducing debt, allocating $10,000 annually to debt reduction, and then gradually increase savings and investments.
How to assess if personal spending is reasonable
An effective way to assess whether personal spending is reasonable is by evaluating savings rates and the Debt-to-Income Ratio (DTI). A household earning $75,000 per year and saving $1,250 per month has a savings rate of about 20%, which is considered healthy.
