How to Determine Budget Percentages
If you’ve never created a budget before (or if you’ve worked on one but always felt like something was off), figuring out how much to spend on what can be daunting.
That’s why we’re here to help you out—and offer you some sample budget percentages. These numbers can highlight any areas of your budget that may need to be reined in. They also give you a range to guide you as you plan how much to spend on clothing and coffee, housing and horseback riding lessons, groceries and the gym . . . You get the picture.
Why should I make a budget?
We’re not talking about being materialistic; we’re talking about being realistic with the money that’s coming in and going out. A budget’s a plan for your money flow, so your money doesn’t get away from you.
So here we go with some percentages to help direct (not dictate) your budget.
Guidelines for Setting Your Budget Percentages
We believe in giving. Always. Tithing to your church, donating to charities, supporting worthy causes—even if you’re in debt. It may sound illogical, but it’s actually legit. Research studies show that giving encourages happiness! Generosity shifts the focus off of us—our problems, our financial shortcomings—and reminds us of our blessings. Contentment doesn’t come when we have enough, but rather, when we see that what we have is enough. Giving is good for you and for others, and we recommend giving 10% of your income.
We save for three things: emergencies, big purchases and wealth building. Set aside $1,000 in the bank right away. We call that Baby Step 1: a starter emergency fund. This provides financial protection while you’re paying off debt.
When you crack a tooth while flossing and need to get a crown . . . when your toilet won’t live to flush another day . . . when a rival musical gang slashes your tires after you win the big a cappella sing-off—these are all completely unexpected and what we would label as emergencies. But you can pay cash to cover them all instead of going further into debt, because you’ve got your emergency starter fund in place and ready for action!
Saving for big purchases includes saving up for a reliable car to replace the one you know is on its last legs (last tires?). And wealth building is where you’re headed once you’re debt-free and sitting on top of a fully funded emergency fund of three to six months of expenses. Once you reach this point, we recommend investing 15% of your income for retirement savings.
Sometimes in life you’ll be saving much more, and sometimes the saving slows—like when all your extra cash is going toward those satisfying goodbyes to Chase, Citibank, or Capital One.
Eating in, eating out: When we’re not making or consuming food, we’re thinking about food, right? It’s no wonder this budget line is one of the hardest to wrangle. The best way to do so is by meal planning. Just like a budget brings purpose and focus to your spending, a meal plan brings purpose and focus to your food spending.
As you budget from month to month, you may notice your restaurant budget line is unruly or your grocery spending is always excessive. In both cases, you should take a good, hard look at what you’ve budgeted versus what you normally spend. What’s off? Are your expectations unreasonable, or is your spending? Both can be adjusted—you’ll just need to work at it.
Remember Schoolhouse Rock? If not, Google the song “Electricity.” Not only will you learn some solid (albeit dated) science and enjoy a fun throwback to some late 70s music and animation, you’ll also get a nice theme song for this budget category.
Utilities include electricity, water, natural gas or propane, and trash services. Until we learn to run lights on the static energy that comes from combing wooly sheep (like in the video—you Googled it, right?), we need to plan on spending 5–10% for all monthly utilities.
This category covers your rent or mortgage plus tax, insurance, HOA fees and PMI. So when you’re crunching numbers to see if you can afford that lavish apartment complex with pool, pet spa and playground, remember 25%. When you’re plugging totals into the mortgage calculator to see if the neighborhood of your dreams would actually become a monthly payment of your nightmares, remember 25%. We recommend spending no more than 25% of your take-home pay on housing.
(Also, remember the number 15, as in 15-year fixed, and the numbers 10 and 20, as in 10–20% down. We know that’s a lot of numbers. You can always come back to this article when you’re house hunting.)
Spending anything over 25% on housing will make the rest of your budget percentages tight and can turn what’s meant to be one of your greatest blessings—your home—into a financial burden.
This percentage will change when you’re on Baby Step 6, which is all about paying off that home early. Yes, people do that. Not average people, of course—but who here is average?
Gasoline, car tag renewals, oil changes—it all adds up. This category will vary depending on where you live, whether you have a long commute to and from work, and whether you have access to great public transportation. Start by budgeting 10–15% of your monthly income here and tune up this amount as needed.
Sick happens. You don’t plan on it. Be ready for unexpected (or routine) doctor visits and trips to the drugstore for aspirin to nurse an afternoon headache. Most people allocate 5–10% of their budget to health expenses. Of course, this category is an excellent example of how percentages can change from month to month or year to year. If the entire family gets the flu or you fall off the stage while performing in MacBeth and literally break a leg, you’ll have to make adjustments throughout your budget to meet those needs.
Though it isn’t fun to talk about, pay for, or spend money on—insurance is a must. Health insurance to cover bigger things than what we mentioned before. Auto insurance to be a safe and responsible driver. Homeowner’s or renter’s insurance because home isn’t just where the heart is—it’s also where your stuff is. And life insurance because everybody dies. Sorry to be a downer, but it’s true. So make room in your budget for the category no one’s excited to think about.
Lifestyle or Entertainment
If you want to buy tickets to see your favorite boy band perform with the local symphony or join an expensive new workout class or knife-throwing club, you’ll need a lifestyle (or entertainment) category. Most people spend 5–10% of their budget here.
Personal Spending Money
You’re standing in the check-out lane longer than you were hoping, and the mug with a quirky saying that so applies to you is begging for purchase. Should you get it? You really want to. So the real question to ask is, Do I have enough of my budgeted personal spending money left this month for a quirky mug? If the answer is yes, and this is the very thing you want to spend said money on, then treat yourself! It’s the best kind of treat, because you’re still being responsible and hitting those money goals.
That’s what spending money does. It’s the amount you allot per person for those fun extras in life. Do you want to get your hair professionally done, add a figurine to your vintage porcelain panda collection, or buy extravagant shampoo that builds volume and smells like honeysuckle? Put it in this budget category, and space out the more expensive purchases so you don’t overspend in one month.
It’s hard to plan for everything and still make a zero-based budget—unless you have a miscellaneous category. This is for the things that might pop up in a month but aren’t emergencies. You’ll be ready if your kid needs a present for their best friend’s Titanic-themed ice skating birthday party. With a miscellaneous category, you can grab a gift without derailing your budget.
If you see a line item that needs more funds halfway through the month, move money from here to there. If you don’t end up spending anything from this category, put all that extra cash toward your current Baby Step!
What if I Have Debt?
If you have debt, you’ll certainly need a budget so you can pay it all off as quickly as possible. Lower any unnecessary spending to free up more money to go toward your debt payments. Try using the debt snowball method—an approach that helps you gain momentum as you pay down debt.
Creating a budget really is that easy—and it only takes about 10 minutes to get started.
A Sample Budget Using Starter Percentages
Since the median household income is around $60,336, we created a sample budget for you based on that amount.(1)
How Do I Determine the Right Budget Percentages?
Of course, multiple things affect where you’ll stand on these percentages. We’re not giving you a rule sheet, like the kind folded up in a card game. These guidelines just help you figure out where your spending is off track.
Your spending habits will change as you progress through the Baby Steps. For example, we list giving at 10%. However, once you reach Baby Step 7, that percent increases! This is when you’re living and giving the good life. All your hard efforts are rewarded both to self and service.
There are plenty of other budgeting percentage guidelines out there. One of recent popularity is the 50/30/20 budget plan. This sets all spending and saving into needs (50%), wants (30%), and savings (20%). While this is better than starting with no perimeters at all, it leaves budgeters with too little information. How much of the 50% goes toward food, utilities, housing and transportation? Plus, that 20% savings section is for savings, retirement and debt payoff. That kind of thinking makes for very slow progress toward all your money goals. Our debt snowball method and percentage guidelines set you up for far swifter success.
How Do I Make a Budget That Works?
As you plug in your own numbers, remember: You’re building a budget that works for you, your family and your life, while still being diligent in spending and saving well. Always, always make sure you aren’t spending more than you make.
Your job is to add up your planned spending, track your expenses, and close out your budget each month. And we’ll be here, keeping it all together as we motivate you with encouragement (yay you!), tips (try this.), and information (did you know?).
What’s important is that you’ve made a conscious plan with your money. You’re calling the shots and giving every dollar an intentional job.