Budget

Budgeting By Percentages Does Not Work

The one thing that stands out to me when I read personal finance books is how they “generalize” about budget category percentages. Most authors will advise that you spend “x percent on housing, y percent on food, and z percent on clothing.” The plain truth is, simply using generic percentages does not work. To build a quality, accurate, usable budget, you need to work with the real facts of your own situation. Simply note your own, unique situation, and tailor a budget that is specific to your finances. For instance, my daughter is involved in gymnastics. In order to pay for her gymnastics classes, we had to create a “gymnastics” budget category. And, WE had to decide what percentage of our income that we would allocate for those classes. It’s been my experience that most people try (especially when first trying to budget) to fashion their budgets according to the percentages that they find in a book or on some online financial calculator. The important thing to remember about a budget is: Your budget does not tell YOU where you are going to spend YOUR money. A budget is simply a tool that allows YOU to tell YOUR money where IT is going to be spent. You are in control. The real key for a successful budget? Your budget should accurately reflect the REALITY of your circumstances. Don’t try to create some “pie-in-the-sky” perfect budget. No one is going to praise you for how close your percentages line up with some personal finance guru. My two cents? Know how much you are going to make in a month, and allocate that specific amount as you see fit, remembering to allow for savings, emergency funds, long-term goals, and irregular spending. The percentages are up to you. Time for a double negative? Don’t “not budget” because you can’t get the percentages to look like someone else’s. Budget because it helps you manage your money.

4 thoughts on “Budgeting By Percentages Does Not Work

  1. I think you’ve got a great point – you shouldn’t budget by percentages, but I think they can be very helpful in analyzing your spending habits after the fact. If you find a quarter of your finances are going to entertainment, you might find it a more frugal option to cut it back to 10 percent. But you’re right – hard and fast percentages make budgeting unrealistic!

  2. I think the percentages are also useful to see if you are making ‘smart’ financial decisions. For example, if you look at your budget and you are spend 35% on your car payment and the suggested percentage is 15% you might want to look at that category and really examine if that is where you want to be spending your money.

  3. Edenz… the main problem that I see is that people get frustrated when their percentages don’t align “perfectly” with the suggested percentages, and give up, and go on without using a budget. Having a personal ‘percentage’ goal is one thing, but feeling like you have to conform to some author’s idea of a proper percentage is another… thanks for the comment!

  4. Pingback: the PearBudget blog » Percentage Budgeting

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