Big Life Expenses: How Much Is Too Much?

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Amy sat at her desk, looking at her completed tax form.  “If I made that much last year, why don’t I feel like I ever get ahead?  I watch all the little ‘leaker’ expenses the way I’m supposed to.  What’s wrong with this picture?”


While Amy’s right in being concerned that money can slip away through small “leaker” expenses, in truth it’s the big life expenses that determine if we’ll make it or break it.

They are all related to specific decisions you make … but all too often they’re made without really considering the true financial implications.  They include where you went to school, what you drive, where you live, how many children you have and how you’ll retire.

So how does that work?

Well, some financial advisors figure we’ll spend over half of everything we earn in our entire lifetime just on those five things!

Here’s how:

Your College Education

A college education isn’t translating automatically into a well-paying job any longer, so college debt needs to be taken on carefully.  The rule of thumb here is that your total loans shouldn’t exceed the average annual income you expect to earn in the first ten years out of school.  So, $45,000 average income?  $45,000 in total school loans.  $75,000 average income?  $75,000 in total school loans.  This means you’ll be paying 10% of your annual income each year, over ten years, in order to repay that debt.

Your Car

The general rule is that your car shouldn’t cost more than one-third of your annual income.  So if you make $100,000 a year, you should be driving no more than a $33,000 car.  (If you think of how many people making $40,000-50,000 a year are driving more than $13,000-17,000 cars, you can see how quickly things get out of hand.)  Your car carries other expenses too.  In short, the total monthly expenditure for your car (including car payment, insurance, registration, parking, fuel and servicing) should hover around 10% of your monthly gross income.

Your House

Here the rule is the reverse:  the rule has always been that the price of your house should not be more than three times the annual income of all contributing earners in the home.  So if you make a combined $100,000 a year, you should be living in no more than a $300,000 house.  But varying mortgage interest rates and property taxes leave some flexibility in that rule.  In any case, the total monthly expenditure for your house (including mortgage payment, insurance, property taxes and general maintenance) should hover around 30% of your monthly gross income.

Your Kids

The Department of Agriculture publishes numbers each year on what it costs to raise a child.  The latest publication, for children born in 2012, says that a middle-income family can expect to spend about $241,080 (or $301,970 adjusted for projected annual inflation of 2.5%) for food, shelter and other necessities associated with child-rearing over the first 17 years.  Second and third children cost a little less.  But that’s before college.  (Note: some of the shelter costs are already covered under “Your House”.)

Your Retirement

Lots of different “rules” exist for this one.  One rule of thumb is that you’ll need 25 times your current annual income in order to maintain the same standard of living when you retire.  That means that, if you’re at $60,000 annual income, you’ll need $1.5 million saved by retirement.  Inflation, interest rates and typical investment earnings all wreak havoc with this kind of calculation, but the rule of thumb at least gives you a rough idea of the magnitude of savings needed.

The Big Life Expenses Challenge

Not all big life expenses are incurred at the same time.  But look at the figures:  10% of your gross income for school loans, plus 10% for a car.  (Or do you need two cars once the kids come along?)  Then 30% for the house.  Plus each child at nearly $250,000 (plus college).  And retirement?  If you saved from age 25 to 65, you’d have to average $37,500 in savings, interest and earnings each year for the example we gave.

And all of this is before you pay your taxes.

While these numbers look scary, the purpose is not to frighten you.  Instead it is to be sure you make each of these decisions conscientiously, understanding that the lion’s share of the money you’ll be spending over your lifetime will go towards big life expenses.

Only after that can you start worrying about the little “leakers” that make it easier or harder to close out each month.

Let us know in the Comments section below if you realized how much of your annual expenditures were wrapped up in so few decisions.


Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial  peace of mind.

  • Nate Leung

    Hi Sharon,

    Some eye opening stats here. That ones especially when you retire and I know a lot of baby boomers are not meeting in this dept and that is scary! It’s all about saving for that rainy day and make sure that you’re prepared!

    • The purpose is really to make us sit up and pay attention to decisions we make “just in the course of life.” We have so much discretion over each and every one of them. But we DO need to take responsibility for the outcome of each decision. Otherwise, as you say, Nate, it’s scary!

  • Roslyn Tanner Evans

    After reading this I’m sure glad we are where we are now in our financial life. Neither of us earned big salaries as civil servents but we have pensions, paid for our childrens educations so no one has school loans, help some kids out from time to time and are able to enjoy life. I can see from above how much planing and thinking needs to go into the big choices. I can see which of our kids will be ok and who will wobble. Great info- This is also an evergreen content, even if numbers change.

    • Thanks for the kudos, Roslyn! I have people asking for guidance all the time, so thought it was time for an overview. The rough guidelines of “what percentage of gross pay each item shouldn’t exceed” have survived for ages. What varies are certain elements I mentioned, like interest rates and expected investment returns. A mortgage at 3.5% vs one at 6.0%, for example, will affect how much house to buy, but the 30% of gross monthly pay is what tends to stay constant.

  • Wow! Great insight and perspective on lifelong finance items.

    • Thanks, Lynn, I’m glad the 30,000-foot view is helpful!

  • Always looks so easy on paper… putting it into action… that’s the hard part!

    • One bite at a time, Knikkolette, one bite at a time. 😉

  • Scott Glaze

    Wow! This is really helpful benchmarks. Great post Sharon!

    • While they are just benchmarks, or guidelines, Scott, by being too far out of line on one definitely hampers our ability to have the funds for the others …

  • Kung Phoo

    Very insightful post.. I did not know there were some kind of calculations that were made for what we should or should not be doing.. Very interesting.

    • Rob, they’re based on masses of cases, gathered over the decades. They are not cut in stone, but you can quickly see how easily you can reach 100% (if you include the tax bite) and leave yourself strapped for years.

  • Wingate Wyndham Sulphur

    So true! If you overspend on one of these 5, you may have nothing left over for the small expenditures and always feel broke.

    • You’re right, Heather. We commit to those big ones, often without considering that they’ll skew our finances for years, or even decades! That’s partly why there were so many foreclosures and bankruptcies after 2008: people were overcommitted with no place to go …

  • Meryl Beck

    It’s is so important to be aware of where you are spending your money and make conscious decisions. Having a financial plan and goals are important so that you can be successful in all areas of your life and future.

    • As you so rightly say, Meryl, this explains clearly why we have to be open and honest with our numbers. If we aren’t clear about our commitments, and what they represent in terms of our total income, we can get into trouble so easily …

  • Carmen

    It’s incredible the way everything just adds up without you realizing it. Thank you for the guidelines. So helpful.

    • That’s why I thought it was important to share this article, Carmen. Those are long-term commitments in most cases. And any change in income (for example, the disruptions after 2008) causes financial distress that is very hard to overcome …

  • Heather Cameron

    So true, those numbers can be scary. The part of it is planning if something happens. Losing a job, an illness. Those can destroy your financial health very quickly.

    • Heather, that’s the risk. By committing to the max on each one, there’s no room for those life incidents … and we’re all exposed to them. Look at all the mortgages that were affordable with two incomes … and then look what happened when one or both people lost their jobs after 2008. Thanks for pointing that out!

  • Diana Foree

    Looking at the big picture is hard to take sometimes, especially if you haven’t been careful. Each item is essential to good financial planning. You have to be smart when you’re young and not try to catch up when you’re 62.

    • Lots do have to catch up later in life, Diana. Those (particularly women) are the people I often mentor, putting together a patchwork to ‘deconstruct’ and ‘reconstruct’ their finances. Not always easy, true.

  • Veronica Solomon

    You provide such great practical information on handling finances better. I have learned so much from this post.

    • I’m glad it was helpful to you, Veronica. My hope is that women absorb pieces as they read, and put together a viable financial plan for the future.

  • jessica

    i’ve never thought about some of these points, which are fantastic to consider and think about before the time comes!

    • These points aren’t often discussed, Jessica, which is why I take such joy in sharing them! Money is one area where “ignorance is NOT bliss!”

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  • I Love how you break down finances for people thanks for all you do

  • I loved the points you made about the percentage of income that you should spend on life’s bigger expenses. Good rules of thumb, and a great
    reminder. Thanks Sharon.

    • Dawn, we used to be raised hearing these rough percentages. But with so much credit available–especially things like $0 down, 0% for 24 months–it makes too many people think they can afford everything. And that’s not usually the case …

  • Diana Foree

    Good for them to have you to help them.

  • Anni Bricca

    Thank you. I really appreciated this, especially from the child cost standpoint and ‘discussions’ with my ex about the costs of raising a child. Thank you.

    • Glad the information is useful, Anni. I know how much easier it is to hold a position in a conversation if we are prepared, with statistics …

  • I am well aware of this big expenses. Having lost it all and now rebuilding… More aware than ever before. Rebuilding one day at a time.

    • I had to do the same, Katrina, after 9/11/2001. And when we do so, we do so much more conscientiously, don’t we?

  • Lisa

    Wow, why does no one mention this in highschool when you’re applying for university? I had no idea there were rules, and Im’ glad that I’ve followed some of them intuitively. Your post has made me remember a membership I was meaning to cancel and forgot about…. Thank you so much, I will share far and wide!

    • Thanks for sharing it, Lisa! Yes, some of us do intuitively land within the rough guidelines, mostly because they’re pretty grounded in logic. But you’re right, it would be wonderful if we started off our independent lives with this kind of knowledge in our back pockets!

  • Kelley Harrell

    Nicely put. I love that you can discuss financials in an affirming and informed way, Sharon. Really brings it into perspective.

    • The key, Kelley, is first removing all emotion from numbers. Then removing all the confusion used to keep the topic in the realm of “too hard to understand.” Hogwash.

  • Dianna Vaught Bonny

    Very informative and makes me realize I am way behind the eight-ball. The one good thing I have going for me is zero debt. Good things to ponder. Thank you Sharon.

    • Zero debt is huge, Dianna. Then it’s a matter of choices going forward. At each purchasing decision, prioritize. Decide if it’s taking you ‘toward’ or ‘away from’ your most important financial goal.

  • The figures that alarm me the most are the cost of raising children. They are definately the biggest expense in our family. But I wouldn’t be without them!

    • Those are averages, Carolyn, of course. But what’s important is that few people ever think of the full implication of such life decisions. As you say, few would “be without them,” but knowing the implications ahead of time and deciding WITH that knowledge can’t hurt.

  • luzenir

    Thanks Sharon for all the informative article that you write. Based on this rules, I have a long way to go on the retirement. OMG!!

    • Knowledge is power, as you know. My belief is that, by pulling some of the layers away from our finances, we can make more informed decisions going forward. This may be the first step at looking at what you want YOUR retirement to look like and what it will cost. I know I had to revise my original vision, and have found a creative one that really works for me. But I couldn’t have done it without knowledge.

  • Thank you, Sharon, I learn so much about American finance and expenses from you. In the end our systems do not differ that much and my insight gained: cut down on expenses and my outlook: retirement seems a very long way to be reached.

    • Barbara, the earlier we look at things realistically, the more time we have to take corrective actions. And if we can’t remedy everything, how can we find creative solutions that work for us …? That’s the goal!

  • Pat Moon

    Sharon, this is a very good article. It provides some very useful information. I can see the areas we were far above budget pretty much all through our income producing years. No wonder we are struggling in this down economy as retirees! All income producing adults should read this blog.

    • Thanks for the kudos, Pat. I hope you’ll spread it to whoever you know who fits that description!

  • Wow after reading this I really need to focus on retirement. Going to be 30 soon and I’m no where close to that 1.5 million…

    • If at 30 you are even thinking about retirement, you’re ahead of the game, Marielle. The key is to get your debt dispensed with and start building assets, especially assets that will grow for you over the many years you have left. Do you understand the concept of “compound interest?” Let me know and, if you don’t, I’ll explain it.

  • Susan Schiller

    I’ve never before heard anyone explain these financial basics so clearly. I’ve heard of the 25% housing, which I think you put at 30%, but somehow I missed or never received the percentages on everything else, including retirement. As I read this back-to-back with a conversation on tithing and how it’s presently taught, I can see that the emphasis in my own financial background was on giving, not carefully budgeting or saving. In fact, even as I read this I’m chatting with a group of women who are lamenting their budget woes, which are in large part due to faulty tithing teaching. They are literally giving themselves into poverty, as I once did. Once again, Sharon, I’m grateful for your superb foundational teaching!

    • Sue, I continue to be amazed by the gaps in financial education which, I admit, is close to zero for far too many women. I’m just glad I can share what I know and, hopefully, catch enough women soon enough to turn things around. I see no value in giving everything away and then having to go ask for charity from exactly the same place I gave to. But then, that’s just me. We can’t take care of others if we don’t take care of ourselves …