What 4 categories eat up the largest pieces of your budget pie? I was reading an article on Motley Fool that tried to answer this very question. The results were based on 2013 data from the Bureau of Labor Statistics. Before we get to the four budget categories the article mentioned another interesting factoid about our average savings rate. In the past 50 years our savings rate has dropped in half from 12% to 5.6%. This is an interesting thing to note since we are talking about our largest expenses. Now to the four categories.
1) Housing Costs – 16%
2) Transportation Expenses – 14%
3) Taxes – 12%
4) Utilities and other Household Costs – 11%
The first thing that jumped out to me is what isn’t on this list, medical expenses. The article noted that healthcare expenses was 8th on the list with only 6% of our income devoted to this category. I have a hard time believing the accuracy of this number. Health care costs have been skyrocketing far faster than inflation for decades and since the passage of Obamacare the cost of health insurance has joined in to cause a double whammy of rising expenses.
For example, my health insurance eats up 5% of my income alone. Nearly the 6% figure mentioned above without even spending a dime on actual medical care. It would interesting to see how this number has changed over the past 4 years.
One more interesting detail about health care costs in this country courtesy of Warren Buffet. He recently stated at Berkshire Hathaway’s annual shareholder meeting that the rising cost of health care is the greatest threat to America, not taxes. He mentioned that in 1960 taxes equated to around 4% of GDP but today they equate to only 2% of GDP. Compare this to healthcare which accounted for around 5% of GDP in 1960 but quickly rose to 17% GDP today. That is absolutely shocking isn’t it? Taxes have actually decreased while healthcare costs has more than tripled over the same time period.
Our politicians are currently obsessed with both of these issues, taxes and healthcare. So far we’ve seen nothing to fix the former but the fixes to the later has not only accelerated costs faster than ever but they’ve also complicated and increased taxes at the same time. At the end of the day we have to fix our healthcare mess. The biggest hurdle to a solution is of course the divide between the Democrats and Republicans. No matter what “solutions” either party comes up with, the other party will immediately ridicule them and vote against their measures for no other reasons than spite and obstructionism.
I’ll get off my soapbox for a while and look at the other categories mentioned. First off, why are we separating hosing costs? Category one and four are one in the same. It seems silly to separate the two unless you want the numbers to look more manageable than they otherwise would be. Any who, the other figure that I have doubts about is taxes.
First off, the article mentions the tax number doesn’t include sales, property, medicare or social security taxes. I understand why we are taking out sales tax, it can be hard to calculate exactly what that might be. But why are we removing the other three? Medicare and social security taxes total about 7.65% for employees and 15.3% for people self employed. There are income requirements that could raise the medicare tax rate and after a certain income amount social security taxes do disappear.
Despite that complexity, the tax number should be at least 20%. Anything lower than that is simply misleading. Anytime you run across an article like this the devil is always in the details. You can do a lot of things to make the numbers look better than they actually are but the essence of the article is correct. Most of our income is ate up by the expenses from only a few categories. Somewhat depressing to think about but it is true.