In this second post I want to take a more in depth look at the first 3 steps of my budget building process. As I mentioned in the first post of this series, we want to identify the typical household income for our area and commit to living off roughly the same amount. 

1. Determine the typical median household income in your area.

As part of the census (in the US), the government collects household income data. A great resource for searching your area to see what’s typical is city-data.com. You can search by state from the main menu and get a list of every town with more than 6,000 people. Then just pick the one or ones near you to get a feel for what’s typical. 

Another equally valid method is to find the cost of living index for your county. C2ER collects data on prices all over the country and compiles that data into a by-county index. You can find the cost of living index on city-data.com too.  An index (of any sort) is a relative measure where the average is always 100. So if you take the cost of living index for your county divided by 100, that is the typical cost of goods and services as a percent of the national average. Which means that if you take the nationwide median household income and multiply by the cost of living index for your county divided by 100, you can get a decent indicator of how much it would cost to live like a typical household in your county.  For example, say your county has a cost of living index of 92 and the nationwide median household income is 60,000. That would equate to 92/100*60000 = $55,200 to live like a typical American given your area’s costs. 

Both methods have strengths and weaknesses to them, but those only really matter if you need to be precise. We just want to get the lay of the land. For that, either method is good enough. 

2. Using the amount from #1 as a guide, commit to an annual core budget that is no more than 10-15k per year more than this. 

This eliminates the temptation to allow your expenses to creep up and up until you’re spending most or all of your income on just you. I believe this is why Jesus called riches deceitful – they are sneaky.  

You may be concerned that this restriction is unreasonable.  If you make substantially more than this and live right up to that amount you are correct, it probably is unreasonable to expect a sudden change. It will take time to bring down your expenses. You may have memberships that don’t expire for a year. You may find you have too many, too big, or too expensive cars but trading them in would just result in even more loss than just paying it off and then keeping it.  Or you may have a house that’s unnecessarily large or nice – but it wouldn’t be reasonable to expect someone to just up and move.  In any event, the concern over the reasonableness of intentionally living about average implies that there’s some punishment if you don’t live that way. As a budget guy I think this approach I’ve outlined best meets Jesus’ intent for us; you don’t have to agree and you aren’t “bad” if you disagree with me. I only ask that you give thought to the subject and consider how you are living Jesus’ example. 

3. Determine your monthly core budget, adjusting for taxes and other considerations. This is necessary for those in a different tax bracket or with different sources of income than the typical household’s income. 

Because we have a graduated income tax, our effective tax rate changes depending on how much we make and what deductions we can take. That makes figuring out take home pay very difficult if you make more than the amount you choose to spend. Again, I have two ideas for how to approach this. 

The simplest and maybe most effective is to just take 10% for federal and whatever your state wants (call it 5% in NY). In my example, $55,200 is what was average. Say I want to live on $10,000 more than that. My take home annual pay would be: 65,200 – 6,520 – 3,260 = $55,420. Divide by 12 for a monthly budget of $4,618. Done. 

You can get more complicated by using the Office of Personnel Management’s withholding calculator (Google it). That will give you your federal taxes. Add in 6.2% for social security (up to the salary cap) and another 1.45% for Medicare to get you overall tax burden. Then you just have to determine your state’s cut. With that information you can subtract those amounts from your starting core budget and divide by 12 for a monthly budget. Chances are it will be within spitting distance of my simple method.