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Posted 07/25/2021 in Family Finance

What Family Expenditures Should I Prioritize for Reduction?


What Family Expenditures Should I Prioritize for Reduction?

What Family Expenditures Should I Prioritize for Reduction and What are the Key Savings Levers to Pull?

In this article we'll talk about the biggest categories where American families spend their money.  Rank ordering the average American family expenditures should help those who wish to save as much money as possible prioritize where to focus their savings time and effort.  Let's say by being determined and very focused we could save up to 10% of any of our expenditures. Well, it is better to focus on a $10,000 expenditure and save $1,000 rather than spend a lot of our time and effort on a $100 expenditure and save only $10.

We'll also talk about what levers we can pull to reduce some of these expenses.

Based on the data from the U.S. Bureau of Labor Statistics, here are the top 12 expenditure categories explaining where American families spend most of their money.

Table 1:  United States Household Average Expenditures in 2019

#

US Household Expenditure Categories

US Average ($)

% of TOTAL

1

Housing

17,975

  36.4%

2

Food at Home

   4,305

 8.7

3

Food Away from Home

   3,326

 6.7

4

Alcohol & Tobacco

     846

 1.7

5

Transportation (Car buying)

   3,929

 7.9

6

Transportation (Ongoing)

   5,951

12.0

7

Telecom

   1,323

 2.7

8

Healthcare

   4,828

 9.8

9

Personal Care

      739

 1.5

10

Apparel & Services

   1,768

 3.6

11

Education & Reading

   1,548

 3.1

12

Entertainment

   2,908

 5.9

 

TOTAL (see Note 1)

  49,447

100.0%

Note 1:  Excludes several categories such as personal insurance & pensions (401k contributions), and cash contributions (charitable, church, and other contributions).


On average, U.S. households spend about $50,000 per year on things like housing, food, transportation, healthcare, and other categories.  An additional $8,000-9,000 not on this chart is spent on 401k and social security deductions, life insurance, and charitable donations.

Let's review these top 12 categories in more detail to better understand what they are, what's behind each one of them, and what the key influencers of each of these expenditures are.  This will help us better determine ways and methods we can use to save money.

 

Housing: Shelter, Utilities, Furnishings and Appliances, and Household Operations

Housing is by far the biggest expenditure that each and every household in the United States incurs.  It includes things like the cost of dwelling, utilities, appliances, and furnishings, as well as other household operating and maintenance expenses.

In order to understand how to reduce the housing expenses we need to break it down further into components and identify what influences these expenditure components.  Only by understanding the key influencers of each expense can we devise ways and methods to reduce such expenses and save money.

 

Table 2:  U.S. Household Average Housing Expenditure Breakdown

#

Housing Sub-Categories

US Average ($)

% of TOTAL

1

Shelter

11,404

   63.4%

2

Utilities

  2,500

13.9

3

Household furnishings & equipment

  1,912

10.6

4

Household operations

  1,450

  8.1

5

Housekeeping supplies

     710

  4.0

 

TOTAL

17,975

100.0%


Given housing is by far the largest category of expenditures for most American families, anyone who wants to achieve significant reduction in their annual expenses and save money (or pay down their debts) should focus on figuring out ways to reduce their housing expense as one of their key priorities.

Over the last seven decades, Americans' love affair with larger and larger homes has been continuing unabated.  The average single-family home size has increased from about 1,000 square feet in the 1950s to almost 2,600 square feet in the 2020s.

 

Figure 1:  U.S. Average Single-Family Home Size and Annual Home Size Growth Rate for 7 Decades (1950s to 2020s)


And do you know what else is increasing while the home size is increasing by 2.6 times?  

  • Your property taxes
  • Your furniture cost
  • Your electricity and natural gas bill
  • Your home maintenance cost, and
  • Your home repair cost

Why do all of these expenses go up when your home gets bigger?

Property Tax:  Your property taxes are usually based on the assessed value of your home.  And home values depend primarily on the size of your home. So, the bigger the home, the bigger the value.  And the bigger the value, the bigger the tax. It is that simple.   And by the same token, the smaller the home, the less money you spend on your property taxes.

Furniture Cost:  How many rooms in your home are completely empty and have no furniture?  If you are like the majority of other Americans, the answer is, “None.”  All rooms have at least some furniture, and we even use furniture on our lawns.  Oftentimes, when our rooms "look kinda empty" we buy more furniture to make them look "less empty."  That's completely normal to want to make your home look nice, cozy, and complete.  Of course, if you had fewer rooms to fill or less space to worry about, you could make your home look nice, cozy, and complete with a lot less furniture (and thus spending a lot less money).

Electricity / Natural Gas Bill:  It probably won't be a surprise to anyone that the bigger the house, the more heating and cooling it requires to get it to a desired temperature.  To demonstrate how much more money the bigger house consumes just in electricity compared to a smaller one, let's look at Figure 2 below.

Figure 2:  U.S. Average Electricity Cost per Month for Different Home Sizes


So, if you own a home the size of 1,500 square feet, your monthly electric bill would be about $97.   It does depend a lot on geographic location, though.  For example, if you live in Utah or Colorado, the electric bill for a 1,500-square-foot home would be as low as $50 per month.  However, if you live in Hawaii, it would be as high as $200 per month.

Let's compare this with the average U.S. electricity bill for a home twice that size, at 3,000 square feet.  If you own a home that big, on average your monthly electric bill would be $195, ranging from a low of $98 in Utah and a high of $386 in Hawaii.

So, how much potential annual savings just in electricity are we talking about?  Well, if you own a 1,500-square-foot home, you'd pay on average $1,170 per year.  And if you own a 3,000-square-foot home, you'd pay on average $2,337 per year.  That's $1,169 more.  So, downsizing your home by 1,500 square feet saves about $1,200 per year just in electric bill alone.

If you'd like to save money on your largest expense category, housing, the best and the fastest way to do that is to have fewer square feet of a house.  This will lead to reduction of a whole bunch of home-size-related expenses.  (To see how one household's downsize during relation saved over $20,000, click here.)  If switching to a smaller home is not an option that you'd like to consider, then you need to focus on each component of the housing expenses separately and figure out ways to reduce those expenses.

 

Transportation

On average American families spend almost $10,000 per year on transportation.  About $6,000 of that is an ongoing expense, something families pay every single year.  Many ongoing expenses, such as gas and car insurance, are actually paid every week or month.  

The remaining $4,000 or so is a portion of the expense we incur for the purchase or lease of the car.  Whether it is paid in full in cash from the dealer or a car payment is due every month, the government counts it as “Transportation: Car Buying,” not in the “ongoing” category.

Overall, transportation is the second largest category of expenditures after housing and accounts for almost 20% of total annual household expenditures.  And even the ongoing portion of this expense is the third largest expenditure for most American families.

Table 3:  U.S. Household Average Transportation Expenditures

#

Transportation Sub-Categories

US Average ($)

% of TOTAL

1

Vehicle Buying (new / used)

3,929

   39.8%

2

Gas, Other Fuels, and Motor Oil

1,979

20.0

3

Vehicle Insurance

1,434

14.5

4

Other Vehicle Expenses

--

--

 

- Maintenance & Repairs

   842

 8.5

 

- Vehicle Rental, Leases, etc.

   721

 7.3

 

- Vehicle Finance Charges

   218

 2.2

5

Public and other transportation

   757

 7.7

 

TOTAL

9,880

100.0%


 Those parts of the transportation expense that are pretty easy to price-shop such as gas cannot be reduced as much as some other expenses.  With gas, the best you can hope for is saving a few pennies per gallon here and there on your next gas refill by comparing prices on a gas price app and using multiple savings apps.  And even that depends on a reliable gas app with data from your area—driving around, you might gather more reliable pricing than the app.  The most determined savers can probably save as much as 25 cents per gallon, especially if they start using some gas station loyalty programs, stacked with savings apps, and buy gas from shopping clubs like Costco or Sam's Club.  If your car's average mileage per gallon (MPG) is 25 (which is the United States average fuel economy) and you drive an average of 14,000 miles per year (also United States average), then saving 10 cents per gallon will result in the annual savings of just $56.   

To drastically reduce your car's gas cost you'd need to switch to a car that offers much higher MPG.  For example, swapping your 15-20 MPG SUV gas-guzzler for a 60-70 MPG hybrid could save you more than $1,000 each year.  Think about this.  By swapping a highly inefficient SUV for one of the best hybrids out there, you could save the amount of money that is enough to pay for two years worth of gas for your shiny new hybrid!

 

Food:  Food at Home, Food Away from Home, as well as Alcohol & Tobacco

Food, alcohol, and tobacco together constitute more than 17% of the average American family’s expenses.  It is the third largest expense for an average American family and the second largest ongoing expense after housing.

Table 4:  U.S. Household Average Food, Alcohol & Tobacco Expenditures

#

Food at Home Sub-Categories

US Average ($)

% of TOTAL

1

Food at Home

4,305

  50.8%

2

Food Away from Home

3,326

39.2

3

Alcohol

538

  6.3

4

Tobacco

308

  3.6

 

TOTAL

8,477

  100.0%

 

Similar to the housing category above, to better understand how to reduce the food expenses we need to break it down further into components and identify key drivers of each component.  After we understand such key drivers of each expense we can come up with ways and methods to reduce the expenses and save money.

Table 5:  U.S. Household Average Food at Home Expenditure Breakdown

#

Food at Home Sub-Categories

US Average ($)

% of TOTAL

1

Meats, poultry, fish, and eggs

  914

  21.2%

2

Fruits and vegetables

  823

19.1

3

Cereals and bakery products

  548

12.7

4

Dairy products

  429

10.3

5

Other food at home

1,591

 37.0

 

TOTAL

4,305

  100.0%

 

When it comes to grocery expenses, the best ways to save include:

  1. Paying attention to the cost per unit (per once, per pound, etc.) of whatever you buy making sure you always compare the cost per unit of different sized and similar products,
  2. Including both national brands (such as Kraft, Heinz, Procter & Gamble, etc.)  and store brands (such as Great Value at Walmart, Millville at Aldi, Chek at Winn-Dixie, etc.) in your cost comparisons
  3. Shopping in stores that tend to be lower in price than their competitors.  For example, Walmart and Aldi will be less expensive on average than Publix and Safeway,
  4.  Actively using coupons and discounts to reduce the cost per unit even more,
  5. Paying with a discounted gift card or cash-back card.

 

Healthcare

Healthcare is one of those categories that will increasingly be what we'd call the Anti-Jackpot for an average American family.  Why Anti-Jackpot?  When you play a lottery, you hope to win big, dreaming of scoring the Jackpot!

But as far as your health is concerned, you hope to never draw the "losing" ticket on any of the major illnesses.  Especially you don't want that in the United States.  The United States, unfortunately, has by far the most expensive and the least affordable healthcare of anywhere in the world.

Something that in most other countries costs a penny, in the US costs an arm and leg (and in some cases your first-born too).  So, falling ill in the US, whether you are blessed to have a health insurance or not, is like winning the Anti-Jackpot.  With the Jackpot you are laughing all the way to the bank.  With Anti-Jackpot, the US Healthcare system is the one who gets to laugh.

The fact that the US Healthcare system is so absurdly expensive is now a well known fact even outside the US.  In Europe there is even a meme about where one could find the most expensive overnight accommodations in the world (see Figure 1 below).

Figure 3:  Absurdly High Cost of Healthcare in America


Considering more and more Americans are getting older and entering the age when getting ill is becoming a "normal" part of life... well, let's just say, we don't wish you win the Anti-Jackpot and have to face the full brunt and humongous expense of the American healthcare system.

Table 6:  U.S. Household Average Healthcare Expenditures

#

Healthcare Sub-Categories

US Average ($)

% of TOTAL

1

Health Insurance

3,291

   68.2%

2

Medical Services

   889

18.0

3

Drugs

   470

  9.7

4

Medical Supplies

   178

  3.7

 

TOTAL

4,828

100.0%

 

One thing that is worth noting when we talk about the average American family healthcare expenses is that the "average" does not show what happens to such expenses when we get older.  To make sure we don't miss this important point, we decided to show you how healthcare expenses for 65-74-year-olds differ from the U.S. average (see Table 7 below).  The difference is almost $2,000 per year or 40%.

Table 7:  U.S. 65-74-Year-Old Household Average Healthcare Expenditures

#

Healthcare Sub-Categories

US Average ($)

65-74 year olds ($)

Difference ($)

1

Health Insurance

3,291

4,797

1,506

2

Medical Services

   889

   974

     85

3

Drugs

   470

   721

   251

4

Medical Supplies

   178

   249

     71

 

TOTAL

4,828

6,742

1,914

 

Now that we know that healthcare is American families’ fourth largest expense after housing, transportation, and food—let’s briefly touch on how this expense can be reduced and brought, at least somewhat, under control.  

Health insurance and medical services are by far the largest healthcare expenses.  The biggest problem that Americans face with both healthcare and health insurance expenses is that they are dealing with two of the least transparent and hence two of the most overpriced industries in the country.  Let's be honest, it isn't easy to deal with that.  But it’s not impossible.  It does involve quite a bit of shopping around and side-by-side cost comparison.  This is easier in the Drugs category.  Buy more generic drugs (as opposed to overpriced, branded ones).  Buy drugs in lower-cost countries like Canada, Mexico, India, etc.  Maybe do some of the more costly medical procedures in lower-cost countries such as India, Israel, Costa Rica, or Canada.  And of course, take the personal responsibility for staying healthy and using doctors only when it is absolutely necessary, to keep the doctor visit-related expenses under control.

 

Entertainment

The fifth largest expenditure category for American families is entertainment, which includes things like TV sets and game consoles, cable TV, Netflix, pets, kids’ toys, tickets to movies, events, and theme parks, as well as a variety of entertainment equipment ranging from photo cameras and treadmills to boats and RVs and even the storage fees if you pay to park your RV away from home.

Table 8:  U.S. Household Average Entertainment Expenditures

#

Entertainment Sub-Categories

US Average ($)

% of TOTAL

1

Audio- and Visual Equip. & Services

   961

   33.0%

2

Fees and Admissions

   747

25.7

3

Pets, Toys, Hobbies & Playground Equip.

   755

26.0

4

Other Supplies, Equipment & Services

   445

15.3

 

TOTAL

2,908

100.0%


It's worth mentioning that with entertainment we got to the expenditure category that is known to savings experts as "discretionary spending."  Basically this means these are the types of expenditures people can “easily” live without as opposed to "non-discretionary spending" (such as housing, food, or medicine) without which people either cannot survive or their lives would be insurmountably more difficult.

Why is this important?  Because non-discretionary expenditure categories are often impossible to get rid of completely.  One can only reduce those.  However, some of the entertainment expenses, when looked at long and hard, can be reduced down to zero.

For example, there has been a growing trend in the United States of people "cutting the cord" or completely getting rid of their now unjustifiably expensive cable TV and replacing it with a much less expensive Netflix or Disney subscription or simply using a gazillion free online options such as YouTube, TikTok, Crackle, Tubi TV, and other types of online entertainment.

 

Education & Reading

The sixth largest category of expenditures is education (combined with reading, which is comparatively small).  Education includes tuition, fees and textbooks, supplies, and equipment for public and private nursery schools, elementary and high schools, colleges and universities, and other schools. The reading subcategory includes newspaper and magazine subscriptions, paper and electronic books, newsletters, etc.

Table 9:  U.S. Household Average Education & Reading Expenditures

#

Education & Reading Sub-Categories

US Average ($)

% of TOTAL

1

Education

1,450

   93.7%

2

Reading

     98

  6.3

 

TOTAL

1,548

100.0%


Of course the range of expenditures in this category among American families is extremely wide.  Let's just take one example—college tuition and fees.  Some families send their kids to college, some don't.  Some are paying in-state tuition, which quite often is under $10,000 per year.  And some pay out-of-state tuition, which could be as high as $40,000 per year or worse. In our subsequent articles we'll talk about ways and methods to keep the education expenses under control and even reduce them.

 

Personal Care, Life Insurance, Cash & Pension Contributions

The last several categories, if lumped together, represent a pretty sizeable expenditure for an average American family—more than $10,000 per year.  This expenditure does combine a bunch of very diverse and unrelated expenditures though, including:

  • Personal Care:   hair and oral hygiene products, cosmetics, personal care services, etc.
  • Miscellaneous:   a bit of a catch-all category that includes banking and credit card fees, legal and accounting fees, union dues, etc.
  • Cash Contributions:  alimony and child support payments, care of students away from home, as well as contributions to religious, educational, charitable, or political organizations, etc.
  • Life & Other Personal Insurance:  life insurance premiums, mortgage guarantee insurance, premiums for personal liability, accident and disability, and other non-health and non-property insurance.

Table 10:  U.S. Household Average Expenditures on Personal Care, Life Insurance, Cash and Pension Contributions

#

Sub-Categories

US Average ($)

% of TOTAL

1

Personal Care Products & Services

   739

    7.1%

2

Miscellaneous

   876

  8.5

3

Cash Contributions

 1,823

17.6

4

Life & Other Personal Insurance

   445

  4.3

5

Pensions & Social Security

6,477

62.5

 

TOTAL

10,360

100.0%


For categories such as cash contributions, miscellaneous, and pension and Social Security contributions it is pretty difficult to come up with recommended ways and methods to reduce such expenses.  They are either mandatory (such as Social Security and alimony payments), or completely discretionary, such as charitable or religious cash contributions.  Also, most families don't need any help making those decisions.  They can easily decide on their own whether to contribute to their favorite political party or charitable cause or save a bit more for their retirement.  Thus, in our subsequent articles we'll talk about ways and methods to reduce personal care products and services as well as life and personal insurance categories.  Still, we have some ideas on how to help families better plan and budget their charitable contributions while applying mental accounting tricks to reduce their other expenses.

 

What are the Key Savings Levers  We Should Pull to Save Money?

Now that we have identified and rank-ordered the average American family's top 12 biggest expenditure categories, let's briefly talk about what key levers one could pull to save money.

It's actually quite simple. Fundamentally, there are only 3 Key Savings Levers for each and every expenditure that we should consider in deciding how much we want to save.  The levers are:

  1. Amount or Number of units of anything we buy
  2. Quality characteristics of such purchased units, and
  3. Price Per Unit we pay.

This means that when thinking about saving money for your family, you can:

  1. Buy fewer Units (i.e. reduce the amount of units of whatever you buy),
  2. Buy units of a different Quality (and "Quality" in this case has a pretty broad meaning—see in more detail below),
  3. Pay a lower Price Per Unit for the same or lower number of units of the same or different Quality.

Let's consider each one of these three in more detail to demonstrate their practical application.

 

Amount or Number of Units We Buy

Whenever we buy anything—houses, food, gasoline, movie tickets, cell phone service, or anything else for that matter—the amount or quantity of all these products and services are measured in various "units."  Here are some examples:

  • Houses:  measured in square feet (or if we buy land, it is measured in acres or hectares)
  • Electricity:  measured in kilowatt-hours (or KWh)
  • Food:  ounces, pounds, or kilograms
  • Beverages:  ounces, gallons, or liters
  • Apparel:  number of pieces of clothes or pairs of shoes
  • Cell phone service:  number of minutes of talking and/or megabytes of data per month
  • Movie, event, or theme park tickets:  number of tickets
  • Jewelry:  carats for diamonds and troy ounces (or grams) for gold or silver
  • Gasoline:  gallons...

Well, you get the gist.

So, if we are serious about saving money, one of the considerations should always be reducing the Amount of Units that we buy or already own.  For example, if we wanted to reduce our housing expenditures, instead of buying or owning a house the size of 5,000 square feet we should consider buying (or downsizing to) a house of, say, "only" 2,500 square feet.   

Quite often one savings lever (like the size of the house example), will automatically help reduce a whole bunch of other units as well. For example, if we downsized from a 5,000-sq-ft house down to a 2,500-sq-ft one, we would automatically pay less in:

  • Real Estate Taxes
  • Electricity (to cool the house down and warm it up)
  • Lawn care (possibly, if our new lawn would also be smaller)
  • Furniture cost (as we'd have a lot less room to furnish), etc.

In other examples, if we were to drink less soda, buy fewer pounds of oranges, or buy smaller diamonds or emeralds, we'd basically reduce the number of units we buy and thus save money.

 

Quality We Buy

The word "Quality" in this case has a much broader meaning than simply "good quality" vs. "bad quality."  All products and services we buy have varying:

  • Tastes and textures
  • Packaging types
  • Attributes and characteristics
  • Features and functionality
  • Designs
  • Brands, etc.

So, by "Quality" we mean any and all of the above.

To start saving money one of the most important considerations should always be looking at and comparing products and services and asking ourselves these questions:

  • Features and Functionality:  "Do we really need all these bells and whistles, especially at this price?"
  • Brands:  "Is a store brand the same—or even better—quality for a lower price?" or "How critical is it for me to wear brand A, which is 5 times more expensive than a similar quality brand B?"
  • Packaging:  "Is a fancy packaging that important for me, or can I simply buy the same thing in a simple, practical packaging and save a ton of money on something I'd throw into the trash anyways?"
  • Attributes & Characteristics:  "Is it worth paying twice as much for the eggs with a specific label or stamp on the carton, when there are at least 12 different egg labels in the United States all confusingly meaning something slightly different?”

 

Price Per Unit We Pay

The third key savings lever is Price per Unit we end up paying:

  • Price per square foot when buying a house
  • Price per pound when buying groceries
  • Price per gallon when buying gasoline
  • Price per ticket when taking our kids to a Disney theme park, etc.

Price is usually a reflection of two things:  (1) Quality (which we briefly discussed before), as well as (2) Where we buy.  For example, exactly the same stuff in Walmart, Costco, or on Amazon could have a significantly lower price than at Fresh Markets, Publix, or Whole Foods.  Or a house in district A could cost twice as much per square foot as the same size house in district B.

So, now that we know which three key savings levers we should always think about, and compare and contrast, before making a purchase decision we should learn about different ways and methods that we can use to help us save more money.

 

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