Now Reading
Budgeting by percentages vs. reality

Budgeting by percentages vs. reality

Sometimes you’ll see suggestions to use percentages to figure out a budget. I tried that once, a long time ago, and decided the idea made no sense because the percentages just didn’t work for our income and expenses. So I just never bothered with making a budget. (Illogical, I know.) I focused instead on trying to somehow come up with enough money each month to eat and pay all our bills, which didn’t really work all that well. I did manage to break even for a while, but it was an enormously stressful struggle.

I realize now that the reason the percentages didn’t work was because our spending in one category was way out of whack in proportion to our income. We were spending nearly 35% of our GROSS income each month on transportation. And it was an even bigger percentage of our NET income: 43%! That’s…huge. And slightly crazy.

But we did not even see it, or realize what it implied. Instead I thought to myself, well, our car payments aren’t that much, that can’t be the problem. It didn’t even cross my mind to add up the TOTAL of our transportation costs (both car payments, plus insurance, registrations, gas, & parking) and compare that to our income. If I had done so, I would have realized that something needed to change, especially since that didn’t even include car repairs or maintenance.

Another problem with a percentage-based budget is that very few people start out with zero expenses and a pile of money to allocate percentage-wise. We’re human, which means that sometimes we buy things without giving a lot of thought to the long term consequences of doing so. Or sometimes we get our first job, feel loaded, and go out and buy something that requires monthly payments (a cell phone, a car.) It’s easy to handle those things when ALL of your income is disposable (such as when you’re living at home) but in the future? Not so much. We just don’t sit there and think, “Ok, now my transportation expenses should not exceed 20% of my net income, because someday I’ll be living on my own and really struggling.” No, we think, “Wow! I’ve got all this money! I can buy a CAR and I’ll STILL have money left over to go to the movies!”

See Also

While I agree that budgeting by percentages does not work, because no one’s going to give you a gold star if your categories all match some magazine’s suggestions, using percentages as a guideline to be sure you are not killing your finances by overspending in a particular area can be helpful. There’s a reason that housing and transportation costs are often capped at 25% and 20% in many suggested guidelines: it’s because housing and transportation costs are usually the highest expenses, and if you go way over in those areas you just plain won’t have enough left to go around for your remaining expenses.

So I think that using percentages is better used as a tool to evaluate which areas of your spending might be the best candidates for cutbacks IF you aren’t able to save and invest a decent amount of your take home pay, or if you’re in debt or consistently balanced right on the edge (which is a disaster waiting to happen).

View Comments (7)
  • A classic example of why budgeting is so important. I remember when my wife and I started budgeting for the first time….she eventually got really into it kind of had her “awakening.” Now she’s the one bringing it up all the time because she wants to know where we’re at. Not only at the end of the month, but at the halfway point too.

    It’s great!

  • I find that looking at percentages is a great tool because it gives you an overall picture of how much of your money is being used for various categories (and can serve as a big shock as was noted). As you mentioned, this is especially a great tool for people early on when developing a budget and also for people who don’t hold to a strict budget but still do monitor their spending and adjust accordingly.

    Nice article!

  • Bob, I don’t see the point in saying “Ok, now I want to spend 20% of my income on transportation, 30% on housing, 10% on food, etc.” I’m still not sure I really “budget” at all now — I just spend much less than I earn. For example, I probably really spend about 3% of my income on transportation — if I tried to “budget by percentages” I’d think I ought to be spending more.

    In the transportation example I gave in the article, I didn’t actually figure out that I was spending too much on transportation until long after I’d stopped doing so. Like more than 20 years later…

  • I don’t understand your argument.

    You claim to not like using percentages as guidelines for budgeting, but you acknowledge that it was only when you figured out that the percentage of money you were spending on transportation was too high that you could address the problem.

    Isn’t that using percentage budgeting? Isn’t that the whole point of using percentage-based budgets? By comparing how you allocate your money to an “ideal” allocation, you can see when you have some categories that are causing problems.

    I don’t think anyone actually argues that you need to match “ideal” budgets EXACTLY. They are a simply a tool that helps you discover where your resources are going and whether, perhaps, the money could be allocated more efficiently.

    It sounds like it was only when you STARTED using % based budgeting that you started to get a handle on your spending

  • I didn’t actually figure out that I was spending too much on transportation until long after I’d stopped doing so. Like more than 20 years later…

    But that’s just the point, isn’t it! Don’t you think that had you figured this out 20 years earlier it would have been helpful? Had you tracked your expenses — even for a single month — and compared that with an ideal budget, wouldn’t you have seen that your transportation budget “was way out of whack”?

    I think you are setting up a bit of a strawman. %-based budgets are simply tools that many people find useful to help them spend less than they earn. It is, in principle, no different than the old “envelope” method of budgeting.

    It is easy to spend less than you earn when you have lots of income. When your margins are slight, some people find strategies such as %-based budgeting useful. Of course everyone’s %’s must be tailored to their own situation.

  • “Of course everyone’s %’s must be tailored to their own situation.”

    That’s my point — instead of tailoring percentages to their own situation, people try to go by these “standard” percentages that they find in a magazine somewhere. They start out by thinking “Ok what percentage of my income should go to cars…” instead of “Ok am I spending too big of a percentage on my income on cars…”

    And it’s also easy to spend less than you earn when you have very few expenses. I’ve worked hard to eliminate common expenses like a car payment, a student loan, a HELOC, credit card debt, etc.

  • Sure. But as I said above, that’s a misapplication/misinterpretation of %-based budgeting. Don’t throw out the baby with the bathwater.

    And, honestly, I really don’t believe that “most people” apply %-based budgeting the way you claim they do. And if they do, they are not using the tool properly.

    I don’t believe that “most people” really do say: “Hmmm, what % of my income should go to cars” and then, if they are spending “too little” do ridiculous things like spend more money on cars to try to get to that higher level. Do you have any evidence that this is what “most people” do?

    Generally, people starting off with a % based budget actually say: “Hey, isn’t it interesting that a whole bunch of “average” ideal budgets recommend that I don’t spend more than XX% on transportation; but, wow, I spend twice that much — maybe I should look at that expense to see if I really need it. Or they say: “Hey, isn’t it interesting that a whole bunch of “average” ideal budgets recommend that I don’t spend more than XX% on transportation; but, wow, I spend half that much — fantastic, I can probably look elsewhere for savings.”

    I don’t think you will EVER find someone who recommends INCREASING your expenses just to meet the ideal budget (with the exception of raising your levels of savings/investments). The ideal %’s are suggested MAXIMUMS based on the average consumer. That’s it.

    A hammer isn’t particularly effective at turning screws, but I wouldn’t suggest that hammers are ineffective tools when applied correctly.

    Anyway, thanks for the discussion.

Leave a Reply

Your email address will not be published.

© 2020 BLUNTMONEY. All Rights Reserved | Disclaimer

Scroll To Top