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The Ultimate Guide to Budgeting Household Income with Percentages

By Priya

July 15, 2020

A percentage-based budget is a popular budgeting system. It’s a quick and easy way to create a budget in under 10 minutes. But just because it’s popular, doesn’t mean it’s the best budgeting method. And it doesn’t mean it’s right for you. 

In this post, we’ll explore:

  • What a percentage-based budget is
  • How to set your budget percentages
  • What percentage should you budget for financial goals
  • What percentage of your income should you save
  • How to handle debt in your percentage-based budget
  • How to calculate your budget using percentages
  • The Dave Ramsey recommended budget percentages
  • The benefits and disadvantages of a percentage-based budget
  • How a Dave Ramsey percentage-based budget works (and fails) in real life
  • How to make your ideal household budget

What is a percentage based budget

Using this method, a percentage of your income is allocated to each budget category. So, for example, you spend 25% of your income on housing, 10% on food and 5% on transportation - you get the idea. In the end, 100% of your income should be allocated somewhere in your budget. 

The most popular percentage-based budget for households is the Dave Ramsey budget. But being popular doesn’t mean it’s the best budgeting tool or that it’s right for you. The right budget for you is like Cinderella’s glass slippers. They’re perfect for you and your life, but it takes some experimentation to find the right fit.

How to set your budget percentages

In any budget category, the best percentage to set is the one you’re really spending. It’s not what Dave Ramsey or any other budget guru hailed as some kind of money god tells you. That’s why I don’t recommend percentages to my students. 

Because what I say, or what Dave Ramsey says doesn’t matter. What matters is your lifestyle, your goals and your priorities. The only way you know what you’re spending is by tracking your expenses.

Below are common budget categories and guidelines on the costs they include.

Food & groceries

After housing costs, food and groceries are the second largest expense in your budget. You eat a lot more of your money than you realise. In this category, I’m talking about food as in ‘eat-to-live’ food. 

Fun food like eating out is a separate thing altogether. If you have enough disposable income for it, then you should allow some for eating out. 

But the less you earn, the lower your eating out should be since it's not essential to your survival. No one ever died because they couldn't eat brunch at that tea room with walls that look like a wedding cake.

Giving

What you give, when you give and how much you give is a pretty personal thing. Besides, not everyone gives money. Some give their time and others give things like books and toys. There are going to be times in your life when you’re struggling to make ends meet. It's okay if you can't always be giving. 

Clothes

Always split your budget for clothes into two parts:

  1. That’s pretty and I want it;
  2. I need this to not be naked.

Clothes in category one fall into fun personal spending. It might be important to you but it isn’t essential. But, clothes in category two are super important if you don't want to get arrested.

Household supplies

This includes household consumables that aren’t food, like cleaning supplies. The bigger your home is, the higher this cost will be. This expense is also impacted by the cost of living in your area and the places you like to shop. 

The good news is that these things don’t expire like food does. That means you can buy them in bulk and stock up on them when they’re on sale. 

Housing

How much you allow for housing will depend on a huge number of things. Consider where you live, how big your home is, whether you’re renting or buying etc.

This is an area of your budget that’s the hardest to influence. You have to live somewhere. To cut housing costs, you can live with family or share with friends but that’s not realistic for many people. 

We often choose to live close to work or public transport to get to work without driving for a billion hours. Moving somewhere else isn’t easy. It's not something that you just decide to do one day.

Sometimes, what you pay is what you have to pay and you have no control over it. The best way to determine your ideal housing percentage is to budget for what you spend.

Percentage budgets will tell you that it should be 25% of your income. Well, in Sydney that isn't always possible. Property prices are crazy high, so if you stick to the rule you risk under budgeting.

If you live in a low-cost area or you’re sharing you might be paying a lot less than 25%. Budgeting for 25% might sound like it’s a safe buffer but what you’re doing is leaving money there on the table.

Spending & entertainment

You’re a shopper like me, so giving yourself some spending money or blow money is a great idea. Being on a budget doesn't mean you magically stop wanting things.

And it can be disheartening to work so hard for your income only to deny yourself every tiny little thing you want. Blow money in your budget is giving yourself permission to spend  money on whatever you want.

The amount of blow money you allow depends on your income, living expenses and priorities.

Don't blow $500 on those suede ankle boots if it means you’ll go hungry for a month. If you can swing it, swing away. If you can’t, then you have to be responsible about how much fun money you give yourself.

Read more: How to Splurge on a Budget (a Guide to Blow Money)

Transportation

Transportation costs depend on whether you:

  • own your own car;
  • lease your car;
  • use public transport; or
  • bike / walk wherever you’re going.

It also depends on the age and quality of your car, how much it costs to maintain it and fuel prices in your area. 

You'll need to consider how much you drive and how fuel-efficient your engine is. Once again, the best way to set your percentage is to see how much you spend in one pay period. Doing anything more or less than that is going to cause trouble for your budget. 

My car is my princess carriage. She has a name and a personality. She’s fuel-efficient and I use her to drive to and from work and to run errands. When we go out on weekends, Mr Bear drives so we take his car. 

We budget more fuel costs for his car than we do for mine. A flat percentage budget doesn’t work for us, because it doesn’t reflect how we actually use our cars.

Miscellaneous

You should always budget for every expense you can. But things happen and unexpected expenses pop up. Try to minimise unexpected expenses by making your budget as detailed as possible. The more detailed your budget is, the less unexpected your expenses are. When they do come up though, you've got a buffer built into your budget to take care of it. 

It’s also a buffer for expenses that are higher than budgeted. For example, you budgeted for $300 for your utility bill. But it came in at $350. With $50 budgeted for miscellaneous expenses, you can cover the extra cost.

What percentage should I budget for financial goals?

Short answer: as much as you can. 

Whether it’s paying off debt or saving up for flying around the world, the more you set aside for your goals, the better. Yes, I know that small progress is still progress.

But if you want to achieve your goals, you need to focus on making them a priority. The less you spend on everything else, the more you can dedicate towards your goals.

And your financial goals aren’t just things like paying off debt and saving for emergencies. It’s anything in your life that requires money, which is almost everything. It’s going on a regular adventure date with your sweetheart. It’s a weekend getaway with your girlfriends for spa treatments and champagne. 

It’s that hot pink KitchenAid stand mixer you drool all over your keyboard for. It’s getting your nails done every week. Or eating croissants at a cafe in Paris.

Money may not buy happiness, but it does buy almost everything else.

Read more: 13 Important Things Missing From Your Budget

What percentage of my income should I save?

The general advice is to save at least 10% of your income. When it comes to how much of your income you should save, I don’t like recommending a certain percentage or amount.

That’s because not all savings are created equal. How much you can save depends on how much you earn, what your essential costs are like and what your goals are. 

The bigger your savings goals are, the more you should save. Saving $200 for that Pandora pendant is a smaller goal than saving $20,000 for a European adventure. But despite how big or small your goal is, the more you save, the faster you’ll achieve your goal.

The percentage of your income that you save should increase as your income increases. Let’s say you follow the ‘save 10% of your income’ rule. If you earn $3,000 take-home income, that’s $300.

Depending on your essential living expenses, it might be too much or too little. The more you earn the higher percentage of your income you should be able to save. 

Just like costs don't go down if you earn less, they also don't go up if you earn more. Well, costs don’t go up but your expenses do. Part of being human is that the more we earn, the more we spend. This is called lifestyle inflation. 

If your essential living expenses are $3,000 a month then you might be saving $0 when you earn $3,000. But you could save up to $2,000 when you earn $5,000. That’s a saving of 40% of your income - much higher than 10%. 

The more income you earn, the higher percentage of your income you can save

What if I have debt?

Your budget should include a percentage of your income towards minimum debt payments. You should also budget extra payments you make as part of your debt payoff plan. 

Paying off your debt should be one of your financial goals. Which means that the more you can dedicate to making extra debt payments, the better. You’ll be able to reach your goal faster.

How to calculate your budget

You should only be budgeting with your net take-home pay. That’s money in the bank after taxes and mandatory retirement contributions. Don’t budget with money you don’t have or that isn’t yours.

If you’re following a budgeting rule like ‘save 10%’ then your calculation is simple. You just need to multiply your income by the percentage. For example, if your income is $1,000 then 10% would be $100 ($1,000 x 10%).

But if you’ve read this far into this post then you know what I’m going to say.

The best budget percentage is the one that you’re spending in real life. And the way to figure that out is to track your expenses and see how much you spend in each budget category.

Total up your expenses then calculate the formula below:

The Ultimate Guide to Percentage Based Budget-IG Post-5

For example, your net take-home pay was $1,000 and you spent $300 on food. You spent 30% of your income on food [($300 / $1,000) x 100]. Do this for all your budget categories until all your expenses are accounted for.

Want me to do the hard work for you? Sign up below to receive your free percentage budget template. It allows you to determine your own percentages based on how you’re spending your money. That way, you can build a budget that reflects your life.

Here is an example of what your complete percentage-based budget could look like. Annie earns $5,000 of income per month. That’s her net take-home pay after taxes and compulsory retirement contributions.

Budget Category

Percentage of Income

Annie's Budget

Giving

10%

$500

Saving

10%

$500

Food

10% - 15%

$500

Utilities

5% - 10%

$250

Housing

25%

$1,250

Transportation

10%

$500

Health

5% - 10%

$250

Insurance

10% - 25%

$500

Recreation

5% - 10%

$250

Personal Spending

5% - 10%

$250

Miscellaneous

5% - 10%

$250

Total

100%

$5,000

You can see from Annie's budget that every dollar she earns within the month is allocated to an area of her budget. That means she's budgeted 100% of her income.

How to track your spending

There are plenty of apps and programs that help you track your expenses these days. But I find the best way is to do it yourself. That way you can make your own categories and personalise your budget to reflect your life. 

You can either do it on paper or in a spreadsheet. I’m a paper lover but I'm also good with spreadsheets (hello, accountant here). Spreadsheets are great if you’re short on time and you don't like using a calculator to add up numbers. They’re also great if you want someone else to calculate things for you.

But when you write things out by hand, your brain processes it differently. You’re more likely to have “oh crap I spent how much on new stationery?” moments when you’re tracking your expenses by hand as opposed to using an app or a spreadsheet.

And despite what you think, you’re not that bad at maths and you won’t be enchanted to turn into a toad if you get it wrong.. As long as you can use a calculator, you’ll be fine. No one is telling you that you need to calculate all this in your head. 

Dave Ramsey recommended budget percentages

The percentage-based budget is a popular budgeting method taught by Dave Ramsey. Below are the percentages he recommends. 

Household Budget Percentage - Dave Ramsey

Dave Ramsey Budget Percentages - Popular, but are they realistic?

I don’t recommend percentages to my students because I don’t spend their money. You spend your money. You live your life and dream your dreams. Your budget must reflect your lifestyle and your priorities, not what Dave Ramsey says your life should be.

Read More: 6 Reasons Why You Can’t Stick to a Budget

Why should you use a percentage-based budget?

Benefits of a percentage-based budget

I'm not a fan of percentage-based budgets and I’ll only recommend it to my students in one situation:

  1. When you have no time and you want a quick solution where ‘something’ is better than nothing. It's like buying a cake mix from a box instead of spending the time making your own cake from scratch and with a ton of love.
A percentage-based budget isn't a long term solution. But it can get you through a tough spot when you’re busy as hell and budgeting is the last thing on your mind.

Disadvantages of a percentage-based budget

That’s where the benefits stop. The biggest disadvantage of a percentage budget is that it isn't personalised for you. I don't recommend a percentage-based budget to any of my students unless it's based on what you spend. And that’s why I'm also not giving my students recommended percentages. 

Because the best percentages you can use are the ones you actually live by. Otherwise, your budget doesn't reflect your real life. That’s what makes your budget restrictive. That’s why you cry with your calculator in hand month after month thinking it’s too hard and that you suck at budgeting.

In my free downloadable percentage budget spreadsheet, it helps you calculate your percentages. It highlights how you really spend your income. This is the best indicator of what your budget percentages should be.

That's because it’s based on your real life and not what Dave Ramsey or anyone else tells you to use. They don't live your life and they sure as hell don't pay your bills. 

Are the Dave Ramsey budget percentages realistic?

Short answer: no. 

The Dave Ramsey budget is based on what’s important to Dave Ramsey and how he thinks you should live your life. It's not about you and that isn’t good enough.

The Dave Ramsey percentages are only realistic for a certain type of person. Someone who earns a certain income, lives in a certain area and has a certain lifestyle. Who this magical person is, I have no idea. But the point is that it’s not you. 

It's not because you aren’t magical. It's because your magic comes from the fact that you’re uniquely you in every possible way. Every percentage-based budget has one major flaw like a giant pimple that refuses to die. It’s not made specifically for you.

And Dave Ramsey is no different. He doesn’t know who you are or how you live your life. He doesn’t know the things on your wishlist that you wish you could afford. He doesn’t know how you spend money to make yourself feel better. He doesn’t know you.

For example based on the Dave Ramsey percentages we should be spending $600-$900 on food every month. For our family of two, this is waaaaay too much. But next door is a family of 4 with the same income. For them, $600 might not be enough.

Sign up below to receive your free percentage budget template. It allows you to determine your own percentages based on how you’re spending your money. That way, you can build a budget that reflects your life.

It doesn’t consider your financial goals or your financial situation

The worst thing about an unrealistic budget isn't that it's harder to achieve your goals. It's that it makes you feel like you’re doing it wrong. It makes you think that you suck at budgeting and that you were born to be bad with money.

You feel like giving up because you never make any progress. It’s too hard and you don't know what you’re doing. You can never stick to a budget. 

Following a budget like this is living your life based on someone else’s expectations. They tell you what should be important to you instead of letting you decide that for yourself.

It’s also a ‘do-everything-all-the-time’ budget. This isn't a good approach because it slows you down. You shouldn't be spending 10-20% on fun spending and recreation when you have a mountain of debt. 

You need to reassess your priorities. Because in the blink of an eye you could be out on the street with only all your pretty things to keep you warm.

Your budget isn’t personalised for you and your life

The right budget is like the right pair of shoes. Not just any old pair of Mary Jane’s or office-appropriate yet stylish pumps. It’s your glass slipper. It fits you perfectly but no one else because it was made by your Fairy Godmother just for you. 

When your shoes are the wrong size, either too big or too small, they cause all sorts of problems. You can't walk in shoes that don't fit you. You’re going to stumble and fall on your face into a pool of hot, steaming mud. And not the kind that refines your pores. 

Imagine you’re out shoe shopping with your eyes closed. You stumble around with your butt sticking out and your hands out in front of you like you’re finding your way in the dark. 

Your hands touch into something - a pair of shoes - so you put them on your feet. You walk around. You stumble and wobble, tripping and falling over everything. Your ankles hurt, your toes are squished and you feel blisters forming on the back of your heels. 

These shoes aren’t the right fit because they’re not made for your feet. They were there when you needed shoes and they didn't work for you. Who knows what you picked up in the dark?

A percentage-based budget is like shoes that aren’t the right fit. It might fit on someone, but it’s the wrong size for you because it wasn’t made for you. It doesn't consider your lifestyle or your goals, which is what makes it so unrealistic to how you live your life.

But these aren’t Barbie shoes that are stuck on your feet. And your budget isn’t set in stone. You can change it so that it’s perfect for you. Calculating your budget percentages based on your spending is the way to do that. You can find your own glass slipper, Prince Charming sold separately.

Low-income earners

A percentage-based budget becomes even more unrealistic when you earn a lower income. The cost of your essential living expenses isn’t always proportional to your income. You can control some costs but nothing is free. 

You can only cut your costs so far. This means that if you have a lower income, all expenses are a higher percentage of your income. For example, if you earn $5,000 a month and you spend $500 on food, then food is 10% of your income. Setting your budget at $500 (10% of your income) is realistic, according to Dave Ramsey. 

But if you earn $3,000 per month and spend $500 on food, then your food budget should be about 17% of your income. You can try to drastically cut your food spending but can’t stop eating to lower your cost.

Maybe you spend that much money on food because you have special dietary needs. Or you have more mouths to feed, or groceries are expensive in your area. 

A percentage based budget is only realistic for a certain income level. If your income is lower, your percentages are sky high and unrealistic. If your income is higher, you’re setting your budget way too high which is also unrealistic to your life. 

It doesn't counteract lifestyle inflation

Percentage based budgets don’t counteract lifestyle inflation. This is the idea that as your income increases, so does your spending. Any increase in income doesn't go towards your financial goals, it gets spent. 

This is hardest to control in a percentage-based budget. Because your budget increases as your income does. A budget of 10% for utilities on a $4,000 income is $400, but on a $5,000 income, that increases to $500.

Is that reasonable for you? Just because you’re earning more income, doesn’t mean all your expenses need to increase too.

There’s too much room for unexpected expenses

Your budget is built based on percentages instead of your actual bills and expenses. This means that it isn’t detailed enough. This leaves a lot of room for ‘unexpected’ expenses that aren’t really unexpected. You just missed them because you didn’t consider them when you were setting your budget.

How a Dave Ramsey percentage-based budget works in real life

Let’s go through an example of a budget based on the Dave Ramsey percentages for two people. This will highlight how generic this budgeting method can be if you don’t live your life like Dave Ramsey.

Annie lives in the big city and works as an office assistant for a law firm. Her monthly take-home pay is $5,000. Bianca is a schoolteacher in the suburbs. Her take-home pay each month is $4,000. For this example, Annie and Bianca live alone and have no dependents.

Budget Category

Percentage of Income

Annie's Budget

Bianca's Budget

Giving

10%

$500

$400

Saving

10%

$500

$400

Food

10% - 15%

$500

$400

Utilities

5% - 10%

$250

$200

Housing

25%

$1,250

$1,000

Transportation

10%

$500

$400

Health

5% - 10%

$250

$200

Insurance

10% - 25%

$500

$400

Recreation

5% - 10%

$250

$200

Personal Spending

5% - 10%

$250

$200

Miscellaneous

5% - 10%

$250

$200

Total

100%

$5,000

$4,000

Annie and Bianca both eat a lot of money. That’s a huge grocery budget for one person. On the other hand, both their housing costs are quite low. Bianca lives in the suburbs but her rent is $1,300 per month. That’s more than 25% of her income but she’s under-budgeted by $300.

Bianca’s budget also says she can safely spend $200 on fun spending each month. But Bianca has $23,000 of credit card debt. Her priorities are to become debt free and save up to buy a new car with cash. 

But you wouldn't have a clue by looking at her budget. She can follow this budget and think she's achieving her goals by spending $200 a month on Chanel lipstick. 

There’s no allowance in her budget for her minimum debt payments, let alone extra payments. She doesn't realise that she can save for her car faster by cutting personal spending. Even more if she reduces her spending on recreation and food.

You can’t tell what Annie’s priorities are either. You can’t tell what matters to her and what’s important in her life. It’s also hard to see any real details about her life. She’s saving $500 per month but what is she saving for?

Does she have a fully-funded emergency fund? Does she have any debt? Is she saving to go back to university and increase her earning potential or is she saving for a trip to Barcelona?

How a percentage-based budget fails in real life

A budget that doesn’t reveal intimate details about your life is a huge red flag. You don’t need to share your budget with anyone but you need to stop hiding it from yourself. It’s like going on a date with a guy who talks only about himself and doesn’t know anything about you. 

Your budget should be incredibly personal to you. It’s your journal and your diary in monetary form. If you look at my budget, you can see that I have high ongoing costs for prescription medicines. What does that tell you about me? It tells you that I have an uncommon and incurable chronic heart condition. 

You can also see that I’m a spender and I like to shop. You can see that I own my own car and I like watching Netflix. My budget tells you that I have no debt and I'm saving up for travelling. 

What does Annie's budget tell you about her life? Better still, look at their budgets together. What makes Annie and Bianca different from each other? Can you tell that Annie dreams of quitting corporate life to open a culinary school? 

Can you tell that Bianca wants to focus on her career and professional development? No, you can't. Because neither of these budgets is personalised to these women.

They reflect what someone else is telling them their lives should be instead of reflecting what their lives truly are. And that is the most dangerous thing about a percentage-based budget.

How to make your ideal household budget

How do I make a budget that works

The only budget you should make is one that is a true reflection of your life and your goals. You can still use percentages to determine how much you should budget for each category.

But those percentages should be determined by your lifestyle and what matters to you. The only way to do this is to track your spending and see how you really spend your money. See what’s realistic for your life.

Sign up below to receive your free percentage budget template. It allows you to determine your own percentages based on how you’re spending your money. That way, you can build a budget that reflects your life.

Why should I budget

Too many people think budgeting is a boring and difficult thing people who don’t like to have any fun do in their lives. But let me tell you, you couldn’t be more wrong. A budget is nothing more than a plan for your money. 

It’s spending your money on paper before you spend it in real life. That means you get to take the time to choose where your money goes based on what’s important to you.

Other budgeting methods to consider

If a percentage based budget isn’t the glass slipper you were hoping for then fear not, princess. There are other methods for you to try on and dance around the store in. Try a 50 / 30 / 20 budget instead or a 70 / 30 budget. If you want total control though, then a paycheck budget (my favourite) is the way to go.


Percentage based budgets are popular for a reason. They’re simple, quick and easy to understand. But just because it’s popular, doesn’t mean it’s good for you. And it doesn’t mean that a percentage based budget is the right fit for your life. You need to try on a few bad pairs of shoes before you find your glass slipper.

Priya

About the author

Hi, I’m Priya! I’m a Chartered Accountant and the creator of Paper Money Co. Life is too short to be constantly worried about money. I want my life to be more than just going to work to pay the bills. Join me as I strive to live a life I love on a budget I can afford (and without going broke)! Are you ready?

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