We’ve all heard financial experts make claims that you should use percentages when trying to figure out how much to allocate for certain expenses. For example, they might say you need to give 10% of your income, save 10%, and spend 80%. Of that 80%, a certain percentage might go toward clothing, another to transportation, and on and on. While these rules of thumb are easy to remember, do they really work?
When it comes to tithing, giving 10% of your income is a great goal. However, we shouldn’t be legalistic about this and forget that God loves a cheerful giver (2 Corinthians 9:7).
For everything else, the question here is: Should you aim at certain percentages when you’re funding your budgeting categories? Here are a few things to consider:
1. Percentages don’t work for varying or high and low incomes.
If you have an irregular income or have a particularly high or low annual income, adhering to budgeting percentages might not work for you. If your income is low, for example, you might not be able to afford a lot of discretionary spending. If you have a high income, you might want to give more than 10% (who knows, you might be able to afford to give away 60 or 70% of your income)!
2. Percentages can help you if you fit within the recommended demographic.
If you find your financial advisor recommends 8% of income should go toward clothing if you’re in the middle class, and you are indeed in the middle class, you probably should take that advice. This all comes down to who the financial advisor has in mind when they are figuring out their recommended percentages.
3. Percentages might change with the times.
When the recession hit a few years back, Suze Orman recommended that people increase the amount of money they save in their emergency fund. Why? Because there was more risk in the economy and she wanted people to compensate for that. This increase resulted in those following her plan to save a larger percentage of their incomes for a rainy day.
During good years, it might not be as important to save money and better if that money were invested instead. Again, this changes the recommended percentages.
An Alternative to Following Percentages
If you’re weary that budgeting percentages aren’t going to work for you in the long term, try a different approach.
When you make a new budget, list all of your mandatory and discretionary expenses. Figure out how much you must spend and then work on your discretionary expenses. Add up all your expenses and see how much money you have left over to spend each month. This money can be used for special projects like paying off your debt, etc.
Notice that this process doesn’t use percentages at all, except of course if you want to tithe 10%.
The great thing about this approach is that it shows you how much you need to spend in your life and doesn’t depend on someone else’s recommended percentages. You can make adjustments every month as needed.
Recommended percentages can be a helpful tool to show you how your budget might compare with others, but you shouldn’t use them in every circumstance. Ask yourself what is prudent in your situation and you’ll create a budget that lasts.
Do you use recommended percentages when figuring out your budget? Leave a comment and let us know.
Percentages are good references, they help people stay in check. You are right, they need to be altered for income levels and geographic areas. I like to look at the graph and percentages to help me see if I am spending too much in one area related to another category. Sometimes it is a wakeup call, for example if transportation or food is running too high, time to take a closer look and explore other possibilities.
Kent, thanks for your comment! Yes, I like to look at the percentages too occasionally to see how my finances are doing. I think the lesson here for people is to not take them ultra seriously, just to use them as a guideline.
I have an very irregular income but have found percentages to be extremely beneficial. Instead of basing the percentages on my actual income I base them on my minimum income. For example if I usually make $1000 a check that’s what I base my percentages on. If I make $1200 I still disburse my budget money based on the $1000 and I get to decide what the extra $200 can go for. Usually debt repayment or maybe I know property taxes are due soon so I’ll set it aside for that. Just recently found your site and the articles are very informative. Thanks!
Percentages don’t work for us, although I wish they did. We live off of a lower single income & because we want our children to live in a safe, quiet area of town we pay a lot for our housing costs. 50% of my hubby’s income goes towards only our housing costs. I would be interested to see how the categories would be broken down for higher & lower incomes however…
We budget all of our fixed bills then divide the rest in between categories.
There are so many people percentages don’t work for! That’s why I can’t recommend them as a solid financial rule. Thanks for your input again Carla!
Corrie, thanks so much for your input! Yes, what you’re doing here is accounting for risk (by using percentages based on your usual paycheck, not those that might be higher than normal). That’s so very important! Thanks for sharing this with all the readers!
Also, thanks for your compliment about the site. We’re here to serve you! God bless you Corrie!