Creating a Household Budget is as Easy as Pi
All math jokes aside, on Pi Day try thinking about how your household budget can be divided up into pieces like a pie.
Happy Pi Day! March 14, or 3.14, is a date normally recognized by mathematicians, since 3.14 is the first three digits of Pi.
It is a favorite day for math jokes. By the end of the day you may hear that a cow pi is what you get when you divide a cow’s circumference by its diameter. A pi-thon is your math teacher’s favorite snake. Statistics show that 3.14 percent of sailors are pi-rates. (Cue laugh track)
There are other pie-related numbers that are worth learning because it can help when budgeting for a car, budgeting for a house or budgeting for retirement. Follow these suggested guidelines when dividing up your household budget “pie.”
0% of the Household Budget Pie: Credit Card Interest
Your credit card could be a great deal if you pay off your balance in full each month, because with many credit cards, you have until your payment due date to pay the bill in full without interest.
However, if you choose not to pay your credit card balance in full each month, you could pay a much higher interest rate. The average household that does not pay off their credit cards in full each month pays close to $3,000 a year in interest payments. Who couldn’t use $3,000 for something else?
15% of the Household Budget Pie: Retirement
A good rule of thumb is to save 15 percent of your salary for retirement. Of course, if you wait until you are older, you will need to save a higher percentage to achieve the same results. If you can’t reach 15 percent, that’s OK — every little bit helps, especially if you make it a practice to increase the percentage allocated to retirement savings each year.
28% of the Household Budget Pie: Housing
This is the housing expense ratio on which mortgage loan approvals are based. You want to keep your housing-related expenses no greater than 28 percent of your household budget. Of course, the lower you can make this number, the more you have available for other expenses.
11% of the Household Budget Pie: Food
The U.S. Department of Agriculture reports that the average American spends 11 percent of their budget on food. Of this, 45 percent is spent eating out. Back in the 1960s only 10 percent was spent on eating out. People back then did a better job at saving money. Is there a correlation? Eating out is sure more convenient and probably more tasty but it also a good way to grow your waistline and shrink your savings. More home cookin’ can switch these trends around.
Less than 50% of the Household Budget Pie: Car Value
Consumer advocate Dave Ramsey recommends that the value of your cars, motorcycles, campers, etc. be no more than half your annual income (that’s car value, not car payments). All vehicles go down in value year after year. A new car can lose 70 percent of its value in just the first four years, easily translating to a $100 decrease every week, after week, after week. Can you afford to throw away a $100 bill once a week? You want less of your money going to what goes down in value so you can use more of it to invest in things that go up in value, like your home and retirement investments.
How does your budget match up with these numbers? Your local Zions Bank branch can be a valuable resource as you review your household budget and explore how to finance household needs like your home or vehicle.
Hopefully, you will take some steps to improve your situation. If not, you are irrational as Pi.
Don Milne is Financial Literacy Manager for Zions Bank.