Why You Should Beware of Percentage Budgets

Budgeting by Percentage

You have seen those percentage budget plans which deftly tell you what percentage of your budget you should spend on which categories. Yes, they are a good guide, but you need to beware that giving too much credence to those percentages could get you in trouble.

For example, the following percentages are recommended in Dave Ramsey’s Financial Peace University book:

Charitable giving 10-15%
Saving 5-10%
Housing 25-30%
Utilities 5-10%
Food 10-15%
Transportation 10-15%
Clothing 2-7%
Medical/health 5-10%
Personal 5-10%
Recreation 5-10%
Debts 5-10%

Why These Percentages are Misleading

They don’t fit high or low incomes.

Dave Ramsey rightfully points out that these are only recommended percentages and that if you have an unusually high or low income, they could change dramatically. For example, a couple who earns $20,000 annually will probably need more than 15% ($250 a month) for food while a couple who earns $200,000 will spend much less than 10% ($1,667 a month) for food.

They may encourage auto-piloting.

It would be an easy thing to make budgetary decisions based on these percentages instead of your own life and goals. Personal finance is intended to be personal, meaning you need to carefully think through all of your income and all of your outgo, and make it fit what you want instead of what some recommended percentages say.

They could detract from following through with your own goals.

Do you know your short term financial goals? Your long term goals? If not, why not? Your finances are not simply dollar amounts; they represent your value system. When Bob at ChristianPF writes My Strategy for Giving Away Millions, he is planning his money (budget) based on his goals, not vice versa.

They might be a nerd trap.

Some people (nerds . . . raise your hands) love numbers to the exclusion of what the numbers represent. One can have a perfectly balanced budget on a perfectly balanced spreadsheet with perfectly proportioned recommended spending, but if those numbers don’t translate to real life, they are only an exercise in math . . . and frustration.

They could be a license for spending more than you should.

If you have debt that is weighting you down, a percentage budget might give you excuses for spending money on such things as car payments and recreation instead of funneling that money into an accelerated debt reduction plan. Again: Your budget needs to reflect your goals, not a formula.

How Percentage Budgets Can Help

They prevent overspending on big ticket items.

Many people could have avoided real estate catastrophes if they had only limited their house payments to 25-30% of the income instead of stretching every penny in order to make their house payments. In the same way, total car payments of not more than 10-15% can give some sanity to those who think they need two or three new cars.

Final Thoughts

Percentage budgets can be helpful guidelines, especially to avoid overspending on big ticket items, but remember: they are merely recommendations. Because budgets represent your goals and your values, start by establishing your financial goals and then tailoring your budget to fulfill those goals.

Then, and only then, will your money truly match your life.

In your budget, how much importance do you give to recommended percentages? When do these percentages help? When have they been a hindrance?

This article was originally published on Personal Finance By The Book on September 15th, 2010.

  1. Kris

    Whyare you hating on Dave Ramsey?! Whoever follows his plan, knows that each person/family has certain circumstances/goals that needs to be met. These are simply guidelines if a person was wondering what percentage may be approrpriate for an average family.

    • John Frainee

      Kris, nobody is hating on Dave Ramsey. The point of the article was to show that these are simply guidelines for the average family. Hope that helps!

  2. Eva

    It’s hard to find any percentages like this for teenagers. I don’t have regular income and don’t have specific bills – but I do need to be saving now for college and hopefully a car (someday). Do you have any specific recommendations for teens who want to get started right with personal finance?

    • John Frainee

      Eva, that’s a great article idea! I’d recommend that teens save as much as they can before they start living on their own. Perhaps 80% saving and $20 spending.

  3. Deacon @ Well Kept Wallet

    I think your point about people feeling like they have a “license” to spend more than they should. I mean if you make $100,000 a year, you would be spending roughly $1,000 per month on food based on this chart. Not that it is bad to spend that kind of money on food, however, it may take away from achieving ones goals like getting out of debt, investing for retirement, kids college, etc.

  4. I agree with you that the percentage budgets has to be based on the person’s annual salary and that the percentage budgets run into issues if a person’s income is a major outlier (high income or low income).

    It reminds me of a retailer’s attempt to entice customers with sales of 25% or 50% off an item. However, one has to take into account the original price of the discounted item especially when the same item is compared with other retailers in terms of price. Percentage budgets are definitely misleading and definitely is lacking in terms of depth.

  5. Courtney

    I actually love my percentage budget. I recently started a 50/30/20 budget, and then sub-categorized these broad categories into spending goals that I would like to achieve. I am actually finding more money to pay off student loans and exercising more restraint in making big purchases. I think the important thing to remember is that the percentage budget is more of a goal instead of a guideline.