Lester Burnham is a middle-aged office worker who despises his job. His wife, Carolyn, is an ambitious real estate broker; their sixteen-year-old daughter, Jane, abhors her parents and has low self-esteem. The Burnhams' new neighbors are retired United States Marine Corps Colonel Frank Fitts and his introverted wife, Barbara. Their teenage son, Ricky, obsessively films his surroundings with a camcorder, collecting hundreds of recordings on video tapes in his bedroom. He also secretly deals marijuana, using a job as a part-time bar caterer to help keep it secret from his father. Having been previously forced into a military academy and a psychiatric hospital, Ricky is subjected by Col. Fitts to a strict disciplinarian lifestyle. Jim Olmeyer and Jim Berkley, a gay couple who live nearby, welcome the family to the neighborhood; Col. Fitts later reveals his homophobia when angrily discussing the incident with Ricky.
Lester becomes infatuated with Jane's vain cheerleader friend, Angela Hayes, after seeing her perform a half-time dance routine at a high school basketball game. He starts having sexual fantasies about Angela, during which red rose petals are a recurring motif. Carolyn begins an affair with a business rival, Buddy Kane. Lester is told he is to be laid off, but instead blackmails his boss for $60,000 and quits his job, taking employment serving fast food. He buys his dream car and starts working out after he overhears Angela tell Jane that she would find him sexually attractive if he improved his physique. He begins smoking marijuana supplied by Ricky, and flirts with Angela whenever she visits Jane. The girls' friendship wanes after Jane becomes involved with Ricky; they bond over what Ricky considers the most beautiful imagery he has filmed: a plastic bag being blown in the wind.
Lester discovers Carolyn's infidelity, but reacts indifferently. Buddy ends the affair, fearing an expensive divorce. Col. Fitts becomes suspicious of Lester and Ricky's friendship and later finds his son's footage of Lester lifting weights while nude, which Ricky captured by chance, leading him to think that the two are homosexual. After watching Ricky and Lester through Lester's garage window, the colonel mistakenly concludes the pair are sexually involved. He later beats Ricky and accuses him of being gay. Ricky falsely admits the charge and goads his father into kicking him out of their home. He goes to Jane, finding her arguing with Angela about her friend's flirtation with Lester. Ricky convinces Jane to flee with him to New York City and accuses Angela of being boring and ordinary.
Col. Fitts confronts Lester and attempts to kiss him; Lester rebuffs the colonel, who flees. Lester finds a distraught Angela sitting alone in the dark; she asks him to tell her she is beautiful. He does, and she begins to seduce him. Lester learns from Angela that she is a virgin and puts an end to the act. He instead comforts her and the pair bond over their shared frustrations. Angela goes to the bathroom and Lester smiles at a family photograph in his kitchen. An unseen figure presses a gun to the back of his head, a gunshot sounds and blood sprays on the wall. Ricky and Jane find Lester's body, while Carolyn is seen crying in the closet. A bloodied Col. Fitts returns home, where a gun is shown to be missing from his collection. Lester's closing narration describes meaningful experiences during his life; he says that, despite his death, he is happy because there is so much beauty in the world.