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!”
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).