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.