This simple budgeting method calls for you to allocate money to various categories as a percentage of your income. The benefit of budgeting by rate is that you don’t have to worry about how much money you earn in a given month. No matter how much you make, the process of managing your money stays the same. If you reach more in one month, you bump up against each category’s percentage accordingly. The drawback of budgeting with ratios is that once all your expenses are filled in, there may be no money left for entertainment spending and vacations.
The simple budgeting method:
Food: 50%
50% of your budget should go towards food. If you live on a college campus and have a meal plan, this number may be lower for you. But if you don’t, it’s essential to plan for the cost of groceries and eating out. If you cook at home, make sure to set aside money for food prep, ingredients, and cleanup (dish soap).
Housing: 30%
30% of your budget should go towards housing. That includes your rent or mortgage, utilities, and any cleaning supplies. If you live in an apartment with roommates, divide up the costs for each room, including things like internet and electricity. This is also the time to budget for monthly payments on any furniture you’ve bought or plan on buying.
Transportation: 10%
10% of your budget should go towards transportation. If you drive regularly, you’ll need to cover car payments, car insurance, or gas costs. If you take public transportation, make sure to allocate money for tickets or passes each month. The standard budgeting percentage for a vehicle is 10%. It would be best to spend on your car payment, insurance, gas, and other related expenses. If you lease your car, the guidelines say to use 20% instead. If you have no car payment or already own a car and don’t need a new one, you’re in luck. You can spend less than 10% of your income on transportation and still be well within the budgeting guidelines.
Healthcare: 5%
5% of your budget should go towards healthcare costs. Healthcare is one of the most important categories of our budget. It’s also one of the most hotly debated. I’ve often said that I believe paying for health insurance is like paying for fire insurance. You pay the premium in case
something terrible happens. That “something” might be an accident, a severe illness, or even a chronic condition.
You might not ever need it, but if you do, it’s one of those things you don’t want to skimp on. The costs can quickly spiral out of control without insurance coverage. I also think that healthcare is an area where planning ahead pays off big time. We have a straightforward plan for our medical expenses, and we save for it every month. So when we need to use it, there shouldn’t be any surprises! Medical expenses are included in the variable category of our budget, so they aren’t represented by percentages in Mint. However, the variable type is included in our monthly budget percentages and total debt payments and savings.
Insurance (including health, medical, auto, and life): 10%
Insurance costs are a significant part of your household budget. The exact amount varies based on the kind of insurance you need, but it’s not uncommon to spend 10% or more of your take-home pay on car insurance and homeowners or renters insurance. Add in other types of insurance, such as life insurance, disability insurance, and health insurance, and that percentage can easily top 20%. Most financial experts recommend spending 10% of your after-tax income on total housing costs (including mortgage or rent, property taxes, and homeowners or renters insurance). It should treat insurance like any other significant expense. You need to budget for it and consider how much you can afford.
Utilities: 10%
Utilities are the expenses necessary for running a household. Utilities may include electricity, gas, water/sewage, and garbage disposal. Like electricity and gas, some utilities will vary month to month depending on the season; others like water/sewage and garbage disposal will be pretty consistent.
Here’s the average percentage of your budget that should go toward utilities:
Renters: 10% to 35% of monthly income
Homeowners: 25% to 50%
Electricity accounts for 34 percent of your utility bill.
Gas accounts for 26 percent of your utility bill.
Water and sewer take up 23 percent of your utility budget.
Trash costs account for 12 percent of your expenses.
Like cable and internet, other utilities account for 5 percent of your total costs.
Personal expenses: 10%
A personal budget is a financial plan that allocates your income toward routine expenses, savings, and debt payments. A budget helps you decide how to spend your money when you get it and reduce your spending when costs exceed income. When creating a budget, it’s essential to consider the percentages of revenue that it should devote to each type of expense. One of the most popular budgeting methods is the 50/30/20 budget, which recommends allocating 50 percent of your income to needs, 30 percent to wants, and 20 percent to savings and debt repayment. Another popular approach is the 70/20/10 Rule, which suggests devoting 70 percent of income to essentials, 20 percent to financial goals, and 10 percent to fun or splurging. The exact budgeting percentages will vary depending on individual circumstances.
Savings: 10%
You’re likely to be spending more on some things and less on others. If you’re making $20 an hour, packing your lunch instead of buying it may save you $5 or $6. That’s a significant saving. But if you’re making $100 an hour, that same savings is only about 1%. Here’s a look at the different types of savings and what percentage of your income you should set aside.
Emergency fund: 3 to 6 months’ living expenses (minimum)
College savings: 1 to 18% of your annual income, depending on your child’s age
Retirement: 10 to 15% of your income
Vacation fund: 1 to 3% of your yearly income
Entertainment (anything fun): 10%
Entertainment is a lonely category. Even though it’s necessary, it’s hard to justify an entertainment budget when you could be putting the money into your 401(k) or paying down credit card debt. But having fun is essential for your health and well-being. If you’re having difficulty justifying this expense, try thinking of it as self-care, something you do for your mental health. How much should you spend on entertainment? It’s hard to say because everyone defines “fun” differently. If you like
to stay home and read a book, $50 per week will be plenty. If you prefer going out with friends and enjoying an expensive meal, $100 might not be enough.
Clothing: 5%
According to the Bureau of Labor Statistics, the average woman spends 5.4% of her income on clothing. But that figure is merely an estimate and one that high fashion consumers may inflate. If you’re like most people, you want to look clean and respectable without spending a fortune on clothes. Here’s how to get your wardrobe in order without breaking the bank.
Should I Use the 50/30/20 Rule for budgeting percentage?
Budgeting rules like the 50/30/20 Rule can be helpful because they make it easy to set up a budget without getting overwhelmed by all the options available. The 50/30/20 Rule doesn’t require you to track every penny you spend or get into extreme detail about your financial goals. It’s also flexible enough to adapt as your situation changes if you’re struggling to meet 30% of your income in debt payments; for example, you’d be better off focusing on paying down debt than worrying about whether that’s exactly what 30% of your income should go toward. The 50/30/20 Rule is also helpful in keeping big-picture goals top of mind. Because it makes room for savings and optional expenses, you may be more likely to stick with it than with a budget that focuses.
