Inside: Need a starting point for your budget? Here you’ll find common budget percentages to help you set up your budget.
Making a budget can seem intimidating. But like most things that seem complicated, it becomes easier once it is all broken down into smaller pieces.
That is how managing your money becomes easier. Take what you have, and break it down into pieces. It tells you what you should do with your money. Later, you review, revise, and repeat.
Why use budget percentages?
The one basic rule of budgeting is to not spend more than you earn. Simple enough.
But breaking down your spending categories into percentages of your budget may make you more aware of your cash flow.
For example, if you are spending over 50% of your budget on housing, that may raise a flag, even if you aren’t overspending overall. If you are live in Silicon Valley, you may choose to ignore that cost-of-housing flag. Or, it may be a signal that it is time to look for a less expensive apartment, house, or even a new city.
When you set up your budget, the dollar amounts give you a number to aim for (or below!). It will help you stay on track to meet your goals and pay down any debt you may have.
Recommended budget percentages
How do you know if you are spending too much?
The basic budget percentage guidelines are a starting point and are loosely based on national averages. You can find the spending information broken down in various ways at the US Bureau of Labor Statistics in the Consumer Expenditure Surveys.
This category consists of your mortgage payment or rent, property taxes, and renter or homeowner insurance.
Utilities can include electric, gas, water, phone, garbage, cable, and internet service.
Your food budget should include groceries, alcohol, and dining out. If you consider dining out more of an entertainment expense, then you can categorize it as such under discretionary spending.
The gas you buy, auto maintenance, taxi fare, bus passes, train tickets, airfare or bike tune-ups all qualify as transportation expenses.
Your clothing budget should be inclusive of all family members and include shoes and coats.
Medical expenses include any insurance payments, copays, and medicines.
This includes amounts to emergency savings, retirement savings, education, or even that big vacation you want to save up for. Establishing an emergency savings fund is the first priority.
Debt Payments 5-10%
This category consists of any ongoing debt payments such as loans or paying down credit cards.
Personal & Discretionary 5-10%
This would be anything else, such as going to the movies, games, books, etc.
If you add up the maximum amount of all those categories, they add up to more than 100%. This is where personalizing your budget comes in.
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Personalizing your budget percentages
Your priorities and your budget will change depending on circumstances.
Daycare is a case in point. The Consumer Expenditure Surveys, as far as I could tell, didn’t specify child care or dependent care. If you have children, that expense could easily be 10-25% of your budget. (How do they not include that in their reports?!)
If you have a lower income, a larger percentage of your budget will go to necessities and there will be less left over to go towards savings. Those with larger incomes should have more money available to into savings.
If you are nearing retirement with two kids in college, your spending is very different from someone fresh out of college with no kids. And if you are a family with kids in daycare, your spending is different from a couple that has no children.
This is why the recommended budget percentages are just a starting point. Your budget should address your needs and goals and not someone else’s.
Perhaps you like to take extended vacations abroad or take flying lessons. Great! As long as the budget balances out, go for it!
And, if at all possible, always save. Emergencies happen and one day you will want to retire. You don’t want to use credit cards as your emergency fund and you can’t take out a loan to pay for retirement.
Refine and revise
It is likely that your expenses vary from month-to-month. Insurance payments may be due only twice a year and property taxes once a year. Maybe you know that you spend more on clothes in August with back-to-school shopping than other times of the year.
With all that variation, it makes sense to refine and revise your budget each month based on what will be happening. As you progress, you may notice areas where spending is too high or, if you have money left over at the end of the month, you can add more to savings or go out for a nice dinner.
It is perfectly normal if your monthly budget percentages vary a bit. Review, revise, and move forward.
The first time you make a budget, your spending may seem to be all over the map and your percentages don’t align very well. Once you start to use, review and revise it, a budget becomes a useful tool and guide.
Do you personalize your budget to vary from the standard recommended percentages?