How do you determine how much to spend on speakers

IMO, it's a major mistake to go into a purchase with a dollar amount. Typical dealer question "How much do you plan on spending?". Then they sell you a speaker at that amount without considering you could have gotton acceptable sound for much less. Or maybe you need to spend more to be satisfied.
I understand people have a budget but if you go in with a dollar amount you will automatically go up to your maximum amount instead of just focusing on the sound.

Here Here Cdc!

Speakers should have little if any character and a flat extended frequency response. Quality drivers and electronics will yield good resolution. There has been little development in the technology of speakers over the last 50 years or so and that is why there are some classic speakers which, used, sell for more today than they did in their day. There is so much bass information in movies, music and even cartoons and commercials today that you would really be selling yourself short by not getting a full range system either satellites and subwoofer or floor standing monitors. A pair of LS35as and a TBI subwoofer will cost you about 2k to 2500 new and little else will compare. A pair of LSA-2s will cost you about 2k and little else will compare. You can get a pair of KEF 105s, used, for about $1500 and have one of the best dynamic speakers ever produced. You could get a pair of Quad ESL 57s for about a grand and a new TBI Subwoofer or a used REL or Janis for about another $1200. As a point of reference if you took the best amplifier on the planet and played it through all of the speakers on Earth you would find that the sound quality relative to cost curve would drop off quite quickly assuming that you were using the above examples(which are just a few of many outstanding offerings). So, though dollars do not necessarily correlate to quality, if you trust your ears and use live music as a reference you can get the best cost relative to performance used for about $1200 to $1500 used and about $2000 to $2500 new. Speakers like Klipschorns have phenominal bass in their way, Fried Transmission Lines have phenominal bass in their way, Electrostatics like Quad are capable of awe inspiring resolution however, and though these qualities are not orders of magnitude greater than their budget competition they are unique and special and quite worth the difference in price for someone who can afford the difference (again, these are just a few of many outstanding offerings). This is why people buy Ferraris when they could get comparable performance for a small fraction of the price.

- The rule of thumb that I would use is the following:

40% of your budget - Speakers
30% - amplification
30% - source

Good luck! -

I think that the formula must include money for room treatment - besides speakers that is the #1 influence on sound quality. Fortunately room treatments are a big bang for buck category too, especially if you can DIY.

Speakers: 40%
Room Treatments: 10%
Pre/Amp: 35%
CD Source: 10%
Wires: 5%

I have always believed the room was half the battle.

The room is the most important component, not the sexiest but the most important. IMO, don't spend big money until you get the foundation settled, then build your system.

If what you've got doesn't sound good in that space, work with the space first and see what improvement you get. Maybe the speaker isn't harsh afterall.