When you create a budget, you are doing more than just tracking each dollar that comes in and goes out. You are also usually calculating what percent of your income should go to each spending category, as well as how much you think should go towards that bucket. That’s how you can see where you may be paying out too much of your hard-earned cash in one area.
Understanding what percentage of your income should go towards each purpose can be a valuable tool for managing your financial life. You might want to cut down on how much of your hard-earned cash is going toward food and entertainment and boost the percentage that goes to paying off, say, a student or car loan.
That’s why knowing how to determine budget percentages is a valuable tool in getting your budget and personal finances on track. Learn how to do the math here.
What Are Budget Percentages?
Even if you’ve already created a budget, you may have been thinking of it more in terms of specific dollar amounts than percentages of your income as a whole.
That’s where budget percentages come in: Rather than assigning a set dollar amount to spend in a given category, budget percentages require us to think instead about the proportional amount of our income that the dollar figure represents.
Take groceries. The USDA lists the average cost of a nutritious food plan every month, and those costs can range considerably. A couple 50 and younger might spend as little as about $595 a month on food at home or as much as $908. (That’s right: the cost of the “liberal plan” is about 50% higher that of the “low-cost plan,” according to the USDA.)
Whether either of those figures sounds reasonable may depend on what you earn, but by parsing each expense as a proportion of the whole, it’s easy to figure out how much you have to spend in each budget category. You can also look into reallocating if you were to get a raise or if your cost of living were to change (say, if you were to move).
Think of it as a pie chart: No matter the amount of cash you spend on a given category, that money represents a certain slice of the pie. Making sure that slice is the right size is important to ensure that everyone at the table — which is to say, each of your line items — will get some.
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Basics of Budgeting Percentages
As mentioned, there are no hard and set rules on what percentage of income to assign to each specific budget category. After all, even the categories themselves will depend on your personal needs and wants. (Maybe you’re a frequent flyer with a budget line item for international travel, for instance, or a music aficionado who has to stash some cash for your growing vinyl collection.)
That said, there are some basic rules of thumb that can be used as a starting place and then customized for individual needs.
Example Budget Percentages
If you ask five financial experts what percentage of your money to allot to a given category, you’ll probably get five at least slightly different answers.
But here are some basic example budget percentages that many experts can, more or less, agree on:
• Housing (rent or mortgage, including property tax and other expenses): 25%
• Insurance (such as health insurance, auto insurance, and life insurance): 10%
• Groceries: 10%-15%
• Transportation (including gas, parking, and maintenance): 10%
• Utilities (such as electricity, internet, and water): 10%
• Savings (including retirement): 10%
• Entertainment (movie nights, dinners out, etc): 10%
• Clothing: 5%
• Miscellaneous: 10%
That “miscellaneous” category gives you the opportunity to devote more cash to categories that you consider worth splurging on, get busy repaying debt, or make charitable donations.
But again, this breakdown is just a starting point. You’re in charge of which expenses matter most to you!
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The 50/30/20 Rule
One popular form of proportional budgeting is the 50/30/20 budget rule, originally popularized in All Your Worth: The Ultimate Lifetime Money Plan, written by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi.
Per this rule, you’d divide up your income and spend 50% on needs, or essential items; and 30% on wants, or nonessential items; and commit 20% to savings.
Of course, you’d then have to further extrapolate how much of that 50% would go to housing vs. food, for example, and how much of that 30% would go to dining out vs. streaming services.
In Warren’s estimation, that 20% would also cover the money being put toward debt repayment, but of course, this isn’t the most aggressive debt-repayment strategy available—and a fifth of your income might not be enough to meet both retirement savings goals and debt repayment goals.
Which is to say, once again, that budget percentages are all about personalization. Which line items do you need to prioritize? Which can you minimize and cut?
How to Make Budget Percentages Work for You
Starting with the guidelines above, you can put budget percentages to work for you to help make your money map more effective … and also to ensure your money is going where you want it to go, rather than allowing it to end up where it will. Odds are, this exercise will be helpful, regardless of which of the different budgeting methods you use.
To start, determine all the categories that need to be accounted for — a list of everything you spend money on each and every month. This will include both necessary costs, like housing and food, as well as wants like entertainment costs, and important financial goals, like retirement savings and debt repayment.
Each and every expense must be represented for your budget percentages to truly add up to 100%.
Then you can start with fixed expenses (like your rent or mortgage payment, insurance payments, etc.) and determine what percentage of your overall monthly income they represent. That way, you’ll know how much you can allot for more flexible expenses, like groceries and gas.
This exercise will also reveal if you’re regularly overspending on a fixed expense. For instance, if you determine that your housing cost is closer to 50% of your budget than 30%, it might be time to consider getting a roommate or taking up a side hustle.
You may want to start by determining your budget percentages with your spending as is, and then create an aspirational pie chart to set your goals.
Maybe you want to spend less on streaming services and save more for travel or devote more of your income to repaying your student loans. It’s all possible with percentages.
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The Takeaway
Slicing the pie into budget percentages makes it easier to meet financial goals and can be a major stress reducer. When you know where your money is going, you don’t have to worry about where it all went. Allocating percentages to your spending and saving categories can help you better manage your money.
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