There’s no “one-size-fits-all” budget model that’s right for everyone. Certain costs are fixed, so the percentage of your budget will be fixed based on your income. Other expenses are variable and unpredictable, so you’ll want to keep them within a certain range. Purchases are often voluntary, so you’ll need to weigh their importance. We’ll explain more about that below.
Debt payments should also be included as part of a complete budget, but you’ll need to review your entire budget first before knowing how much you can pay and before using a loan payoff calculator to make a plan. We’ll address that in today’s article, along with some tips on how to properly set your budget percentages.
Budgeting based on percentage can be difficult the first time you attempt it but gets easier as you become accustomed to it. The below percentages are also dependent upon income. For example, if you take home $3,000 a month, it’s suggested to limit your housing expenses to 25%. However, that only leaves you with $750 for mortgage or rent, which may not be enough, so consider these as guidelines, not rules.
Part 1: Fixed Expenses: 40%
1. Housing: 25%
Most budget models recommend keeping your housing expenses under 25%. That applies to rent and mortgage payments. If you own a home, you might want to also include your property taxes in this category. For renters, include renter’s insurance and any condo or townhouse fees if those apply. Don’t include parking fees here.
2. Car Payments, Transportation, and Installment Loans: 10%
It’s best to keep total monthly car payments under 10%. Ideally, you’d rather see it closer to 5%, but Americans generally trade their cars in before they’re paid off and take out personal loans when they face major expenses. This category should also include general transportation costs, such as gas, public transportation, insurance, etc. Start by budgeting 10% of your income for this category, but try to lower it if you can.
3. Utilities and Internet: Less Than 5%
This is a tricky category because utility bills are controlled by the utility company. You can take steps to lower electricity and heating use, but when prices go up, they go up. Most single Americans pay about $250 per month for utilities and internet, so keeping this category to less than 5% of your income is a good range to stick to.
Part 2: Variable Expenses: 35%
1. Food and Clothing: 20%
Food costs are up 30% to 40% from last year and retail pricing has increased 6.2%, so this category just rocketed up to 20% of your take-home income. Use coupons and take advantage of bulk offerings and store discounts when they’re available. Buy clothing that will last, but don’t overspend on brand names. These tips should help you keep this category at 20%.
2. Debt Payments: 10%
We put debt payments in the “variable” category because we all know how easy it is to overuse our available credit. If your monthly debt payments, not including car loans or installment loans, are more than 10%, you have a problem. Seek out credit counseling or start looking into debt consolidation or debt payoff programs. This is a line item you want to eliminate, but if you have debt, you do need to include it.
3. Miscellaneous and Non-Essential: 5%
No one can go through life without having a little fun. Trying to build a budget without a miscellaneous or “non-essential” category eliminates the possibility of that. Take 5% of your income and put it aside to go out to dinner, order some takeout, or buy something nice for yourself. If you don’t spend it this month, leave it there and spend it next month.
Part 3: Savings, Investments, and Charity: 25%
1. Savings: 5%
Some budgets recommend you save more than 5%, but we consider investments as savings, so the total percentage set aside for your future will be 15%. The savings portion, or 5%, is for your emergency account. If you need to pay for an unexpected expense, use the funds in your savings account. Hopefully, that won’t happen, but it’s essential to have some savings set aside for when you need it.
2. Investments: 10%
To clarify, 10% of your net income should go towards investments. That doesn’t count any pre-tax contributions to your retirement fund. Consider this portion of your budget to be part of your savings strategy. You can invest with a financial advisor or open a retail account that you self-manage. There are several options to choose from depending on your experience level.
3. Charitable Giving: 10%
This number will vary from person to person. Most churches suggest 10% of your income go towards tithes, so we set that as our target budget percentage. For those with more limited income, that may not be possible, but giving should still be part of your financial plan. There’s documented evidence that contributing back to society makes you more productive.
The Bottom Line: These are Suggested Guidelines
Use this blueprint to develop a budget that works best for your circumstances. If you’re going to modify this, consider at least keeping housing expenses at 25% and putting aside a combined 15% for savings and investments at minimum. All other categories can be adjusted up or down, depending on your needs and financial goals. Take your time and be prepared to make adjustments as prices go up or your income changes.