Spotlight on Spending: The Big Three
It’s not how much money you make; it is how you USE the money you make. Have you ever heard this phrase? How about your students? In this post, we’re going to talk about spending – or as we call it – MONEY OUT.
We’ve divided money out into eight spending categories, but today we’re going to focus on the big three: housing, food, and transportation.
What your students need to know, is that understanding where your money is going helps you make a PLAN. A plan lets you have fun now AND set yourself up for future success.
#1: HOUSING
Housing, or shelter, is one of the top three needs for human survival, and a large percentage of your income will likely go to paying rent or a home mortgage, as well as the maintenance expenses that come along with it. Finance pros recommend that housing expenses should be no more than 35% of your income. Ideally, it should be closer to 25%.
Take Henry for example. Henry is renting his first apartment. He has narrowed his options down to two spots. The first apartment is a brand new two-bedroom that is $1,500 per month. The second apartment is a smaller one-bedroom in a building that is a bit older, and it’s just $800 per month.
Henry REALLY likes the first one. But after taxes, Henry takes home $3,000 each month. According to the benchmark for housing - which is 25 - 35% of your income, Henry should spend no more than $1,050 per month on rent. Yikes!
Henry’s first option is over the benchmark by $450. If he chose that option, 50% of his MONEY IN would be GONE – just on housing! What could Henry do in order to live in the apartment he really likes, while also being SMART about his MONEY OUT? One option could be getting a roommate. Whatever Henry does, he has to be smart about spending when it comes to housing so he has enough spending money for other needs.
#2: FOOD
You have to have food to survive, but how much money should you spend on food each month? This is one area that can make or break your budget!
The benchmark for food spending is 5 - 15% of your income. In Henry’s case, his monthly food budget should be about $150 - $450. That does not leave a lot of room for daily coffee runs or Doordash.
Examine your spending habits here to see if you are within the recommended spending benchmarks. Here are a few tips to share with your students:
First - Decide what you’ll eat for the upcoming week. Write down what you need to buy, make a shopping list, and stick to it. Having meals planned out in advance helps you avoid extra grocery runs or last-minute eating out.
Second - Prepare meals in advance. That way, you will have food that is easy to prep when you are not in the mood to cook.
Third - Pay with cash! If overspending on food is a challenge for you, make a point to only use good old-fashioned cash, you can’t spend more than intended if you only have so much on hand.
#3: TRANSPORTATION
Transportation is our next spending category. Students and young professionals may not realize, this includes ALL costs related to transportation, such as car loan payments, gas, maintenance, and registration. It also includes public transportation, Uber rides, etcetera.
Transportation should be between 10 - 15% of your monthly budget. In Henry’s case, he should keep his transportation spending between three hundred and four hundred and fifty dollars per month.
Henry needs a new car, he is excited when he finds a great new truck with a monthly payment of $435. He can afford that, right?
WRONG! Gas, maintenance, and registration also fall in the transportation category. These variable expenses depend on how far Henry travels, how reliable the car is, and what state he lives in.
Henry could also choose to get a less expensive option now, to save MONEY OUT to be able to pay cash for a nicer car down the road.
CONCLUSION
Remember, spending is your MONEY OUT. Our amount of MONEY IN creates limits for our money out. And being able to manage your spending is critical to protecting and growing your MONEY.
Spending benchmarks give guidelines to help your students make smart decisions, and cutting back in one area will provide more money to go to another. A final word of advice for you to pass along - make sure that your spending lines up with your personal values and goals. After all, you will be the one living with your decisions, and it's your money!
While we just focused on the big three categories today, you can go deeper into these expenses and learn about the other five categories by booking a free demo of MONEY by Qnity here.
