Forget the Budget Percentages!
Getting Real with Budgeting
The budget percentages usually suggested when dealing with personal finances demonstrably fail people today. They’re paying a much higher percentage of their income for just about every expense, from a night on the town to a mortgage payment. Wouldn’t it be great to find a simplistic and effective approach to planning spending, and even save money? This blog will suggest not to rely so much on percentages.
So, let’s start on the 50% people use for life’s necessities, and then finish with the 20% that goes to a savings account, because many people, some living hand to mouth, need to get the expenses of everyday life taken care of first. Who hasn’t heard “Pay yourself first?” Unfortunately, does everybody have the budget sense or resources to put away a significant percent at the start of every month?
Whenever you make up a budget, it’s good to look at percentages because they are easy to calculate. People can better visualize what 50 parts of 100 look like than imagine 23 parts of a dozen. To be more precise, the use of 100 units makes the math easier. So, percentages make our personal finances clearer, but does it lead to despair?
What’s Necessity?
It’s not hard to think, “Hey, I made $100 today, and I’ll probably spend $50 on living expenses like a roof over my head or food on the table.” In fact, it doesn’t sound unreasonable. Then there’s 50% leftover to use for fun or 30% for a rainy day. Let’s break down the 50% used for living expenses by multiplying your daily income by 30 (days in a month):
- Your housing (rent or mortgage plus utilities)…25% to 33% of income
- Your groceries……………………………………10%, but for most people, it’s $200 for you, $100 extra for each additional family member.
- Your transportation expenses…………………..15 %
- Your insurance costs…………………………..10 %
This is fine, but not very effective.
How Budget Percentages Defines Stuff
When you see how much money is available for each item in your budget, you get a picture of who you are in the world of personal finance. For instance, If you want to rent a $15,000/month apartment, you’ll need an income of $60,000 a month in income. That rent represents 25% of your income. For most people, that’s high. In fact, it’s luxurious living.
On the other hand, if you make $30,000 a month, you can afford rent in the $7500/month range. But, if you make $3000 a month, you can rent a unit for up to $750. What can you rent for $750 anyway? It’s like that nothing’s available at that cost; maybe a sitting room with shared bath/kitchen. Either raise your housing allowance to say 33% and allow rent up to $990 a month, be generous and round up to $1000 a month, or increase your income.
It might make more sense to add up your expenses, and look at your income and how to increase it to meet your needs.
Budget Percentages: Housing Solution
Of course, the best solution is to get a mortgage on a housing unit, whether a single-family home, condominium, or townhouse. Assuming your ducks are in a row, i.e., get a low-interest rate, a low monthly payment, you are actually paying yourself when you pay your mortgage. Part of your payment becomes equity.
The goal may motivate you to ask your boss for a raise or start a job search if you’re unhappy with your income level. You may get training for a better-paying job. You may wonder if you make enough money to settle down with a significant other and raise kids. Understanding sums as the amounts you need to make life work helps you make clear-eyed decisions.
Need Wheels?
Let’s look at your transportation expense. If you make $60,000 a year, you can afford a vehicle that costs $9000/year or $750/month. That’s 15% of your income divided by 12 months. If you make $30,000, you can afford transportation that costs $375/month.
The cost of automobile ownership is:
- Purchase cost
- Cost to operate
- Cost to maintain
Just throw in the cost of insurance as well. Don’t make another line on your budget. Can you find a way to make enough money to cover the cost?
Budget Percentages: Buying Used?
Obviously, a car dealer might tell you a completely different story because the salesperson wants to sell you a vehicle. Still, if you can boil the figure down to a single figure, and divide it into monthly payments, you can make an informed decision. Every car salesperson would like to take you for a ride, pun intended, but crunch your own numbers.
You may want to save up money to buy a used car for cash, completely eliminating a monthly payment. Or, you may consider leasing a vehicle rather than buying it and being stuck with it for years. If you make $750,000 a year, you may consider splurging for a cab to get you around all the time because you could cover something like $65,000 a year. You could buy a new car every year with cash.
Budget Percentages: Fun
Anyway, these are considered necessities, things like housing and transportation, so the numbers add up. After you’ve paid for your necessities, you should consider living a little.
- Keep your entertainment costs low without sacrificing much.
- Dine out a set number of times a month or week.
- Spend for tech toys, hobbies, on a monthly basis or pattern.
- Plan your vacation.
- Plan your holiday spending.
People enjoy a reasonable amount of fun with something like a third of their after-tax income. Even if you make $3000 a month, you have $1000 to spend on fun, and to some people, that’s big fun. You could even afford a sports event ticket and pay for the hot dogs and coke, though it will be a significant hit on a $1000 entertainment budget. This number includes cable TV, streaming services, hobby magazine subscriptions, and new bicycles or boats. We all want to have fun, and the fun dollars can be spent pretty quickly.
Tip: If you can have just a little less fun or swap expensive fun for less expensive fun, you can reduce your spending.
Budget Percentages: the Savings
Experts might be horrified if you put the savings at the end, and there’s a good reason for that. Getting a payment to yourself into your savings account at the start of the budgeting effort means you’re committed to saving money and prioritizing savings. Your savings rate is often a reflection of your financial health, so it’s good to look healthy in your personal finance.
But we all do it ass-backwards, so who are we kidding? You’ve paid all your bills, and you’ve had some fun. What’s leftover should go into a savings account. If you earn $720,000 a year, you have significant savings at the end of the twelve-month fiscal calendar, something like $150,000! If you make $60,000, you’ll have $12,000 put away with monthly contributions. Not bad. It’s enough to put a downpayment on a car or a house. Way to go! If you make $3000 a month, you will have $600 a month put away! After 12 months, that will be a $7200 savings account, plus some for a rainy day fund!
To be truthful, most people find the prospect of setting aside a rainy day fund difficult. At best, they think maybe $1000 after a spell, but the key might be to put it somewhere and forget it, like an obscure internet savings account. With a forgettable savings account that you remember to put money into once a month, you’re well on your way to reaching many savings goals.
Reasons to save include funding major items like retirement and your kids’ secondary education.
This article was published in 2021, and has been slightly edited.
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