Determining the budget percentages for various expenses is essential when creating a budget, especially if you have significant financial goals such as paying off debt, building an emergency savings fund, or saving for retirement.
Why Use Budget Percentages?
There are some great reasons to focus on budget percentages when setting your budget instead of allocating a fixed amount for each of your expenses. By thinking in terms of budget percentages, you gain a comprehensive view of how your income is spent each month. This makes it easier to identify areas that may need adjustments to meet your goals.
How to Determine Budget Percentages
There are some basic rules to keep in mind when determining budget percentages, and the first question you might ask is: How much should certain expenses be?
Here’s a quick look at how to divide your income:
- Housing: 25-35%
- Insurance (including health, medical, auto, and life insurance): 10-20%
- Food: 10-15%
- Transportation: 10-15%
- Utilities: 5-10%
- Savings: 10-15%
- Entertainment (leisure and recreation): 5-10%
- Clothing: 5%
- Personal: 5-10%
These are the basic categories that your budget will likely cover, but you may need to consider some additional expenses that could impact your individual budget percentages. For example, you might need to allocate a budget for things like charitable donations, debt repayment, spousal or child support payments, out-of-pocket healthcare costs, pet care, childcare, and other child-related expenses (like diapers, extracurricular activities, school supplies), travel, reimbursable business expenses, and saving for unusual expenses (like semi-annual car insurance premiums or annual property taxes).
Including this type of expenditure can make your budget percentages look quite different. For this reason, it’s important to be thorough in accounting for all the expenses you incur each month. You can do this relatively easily by linking your checking account or credit cards to a budgeting app. Alternatively, you can track your purchases in a spreadsheet or note-taking app.
If you’re like most people, it’s likely that the largest percentage of your budget is allocated to housing. Ideally, you should aim to keep this percentage no more than 30% of your income. If you’re spending more than this amount, it may put a strain on your budget. In this case, you might have to cut back on other percentages to make room for higher housing costs, increase your income, or seek cheaper housing.
Using Budget Percentages to Achieve Financial Goals
The easiest way to use budget percentages to reach your financial goals is to break your goal down into months and determine the time needed to achieve it.
For example, suppose you want to save $20,000 for a down payment on a house and have a two-year timeframe to accomplish this. That means you need to save $833 a month. Now, using the previous example of an income of $5,000 per month, saving that amount would represent approximately 16.5% of your income. Based on the budget percentage guidelines outlined earlier, this isn’t too far off from the ideal target.
Of course, it becomes more complicated when using budget percentages if you have multiple goals you’re working on. For instance, suppose you also have a personal goal to save 10% of your income for emergencies each month. If you mix that with your down payment goal, you’re now allocating 26.5% of your budget to savings, which is likely not sustainable.
A good way to handle budget percentages when trying to find the right balance for your financial goals is to start with fixed expenses first. This includes things like housing, utilities, and insurance—bills that need to be paid monthly.
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Calculate each of these expenses and see the percentage of each relative to your total budget. Then, determine if you can reduce any of these expenses to lower this percentage.
Next, move on to your variable expenses. This is what you spend on clothing, food, dining out, travel, entertainment, etc. Again, sum up the total percentage of your budget that these expenses account for, and then see what you can reduce or eliminate altogether.
Now combine the new percentages of fixed and variable expenses. The remaining portion of your budget at this point should be allocated to your financial goals. For example, if your fixed spending accounts for 40% of your budget and variable spending accounts for 30%, you have another 30% of your income that you can allocate to those goals.
It may take some time to find the perfect mix of percentages, and you will need to review your budget monthly. But over time, budget percentages can help you achieve your financial goals.
Frequently Asked Questions
What percentages should I include in my budget?
Check our budget converter so you can add your income and actual expenses to see your percentages. If you find something missing, add it to your budget as a new percentage.
I have created my budget, what do I do now?
Now that you have your budget, it’s time to use it. Over the next months, check if there are any percentages you need to adjust, stick to the limits you set, and track your spending.
What should I do if I don’t stick to my budget?
It’s possible to go over your budget, but there’s no need to worry. If there’s an unexpected expense, limit daily spending. If you find that certain spending regularly exceeds limits, you may need to make adjustments to your budget to prevent overspending in the future.
Source: https://www.thebalancemoney.com/how-to-figure-out-budget-percentages-for-money-goals-4171689
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