Setting up your budget might be the easy part, but how much should you budget in each category? Determining what amount works for your family and finances might be a little more challenging. But there are some basic guidelines to keep in mind in order to figure out the best amount for your current situation.
Dave Ramsey’s Recommended Percentages
Dave Ramsey, one of the leading financial gurus, has a set of recommendations about how much you should spend on each category in your budget. Here’s the breakdown.
- Giving – 10%
- Saving – 10%
- Food – 10-15%
- Utilities – 5-10%
- Housing – 25%
- Transportation – 10%
- Health – 5-10%
- Insurance – 10-25%
- Lifestyle & Recreation – 5-10%
- Personal Spending – 5-10%
- Miscellaneous – 5-10%
In case you’re unsure, the health category covers things like health insurance co-pays, prescription or over the counter meds for sick days, and other necessities for when you (or someone in your family) is feeling under the weather. Lifestyle & Recreation basically includes anything not covered in other categories (clothes, daycare, subscriptions, educational expenses, etc). Personal Spending is for everything you want but don’t need – you might call this your impulse shopping category. Miscellaneous covers those random things that pop up which aren’t exactly an emergency but are something you didn’t plan for (the example given on the Every Dollar blog was buying a gift that you hadn’t budgeted for).
My Thoughts On These Percentages
While these percentages may be a good starting point, I don’t believe they represent reality for every person. The biggest issue I’ve run into trying to use these percentages is being able to purchase enough food. If your family makes an average of $4,000 a month, that only gives you at most $600 to budget for groceries. That may be enough for a smaller family, but not everyone is feeding a small family.
Let’s say you have a family of 4 and you’re only bringing in $2,000 a month. Your grocery budget would be $200-$300 a month. Is that enough to feed your family of 4? Probably not. Not to mention if anyone in your family has special dietary needs that require you to spend a little more on groceries.
As a reference, an average person can eat well for about $7 a day (give or take). That means it would take around $210 a month to feed one person. A family of four would need closer to $840. Using Dave’s percentages, you’d need to make at least $5,600 a month to afford that (which comes out to around $84,000 a year before taxes). So many of the people using Dave’s program (my family included) make nowhere near that amount of money starting out.
Another important thing to note is that, depending on where you live, the amount you spend on housing, utilities, and transportation can vary widely. I think it’s a little bit of a disservice to give blanket percentages without considering how much variability there is in people’s circumstances.
Don’t get me wrong, I love Dave Ramsey’s Financial Peace University and I think it’s a wonderful place to begin to help you get into the right frame of mind and start making progress. But I think there are some aspects that fall a little short.
The 80/20 Rule (or the 50/30/20 rule)
Another way to help you determine appropriate amounts for your budget would be to simply divide your paycheck into 2-3 groups. Both the 80/20 rule and the 50/30/20 rule are essentially the same thing, the latter is just further broken down.
With the 50/30/20 rule, you budget 50% of your income towards your needs – your 4 essentials. Budget 30% of your income for wants – subscriptions, fun stuff, education, etc. The last 20% goes towards savings. The 80/20 rule is exactly the same except the needs and wants are lumped together. I personally think that separating them out is more beneficial, particularly if you’re just starting out with budgeting.
Here’s how I might break down the 50/30/20 rule for my own budget:
- 50% – Needs
- Utilities (gas, electric, water, phone, internet)
- Insurance (health, home, car, life)
- Groceries & Household Necessities (cleaning supplies, personal hygiene, etc.)
- Gasoline & Oil
- Car Payments + License & Taxes
- 30% – Wants
- Cable/Streaming Services
- Toys/Fun Money
- Personal Development/Education
- Short term savings (birthday’s, Christmas, etc.)
- 20% – Savings
- Emergency Fund
- Large Purchases
Of course, the details of your budget may look different than mine, but this is a good starting point. You might also decide to put your 20% towards debt as you work to become debt-free. Or you might decide to split it down further to 10% for savings and 10% for debt. However, you decide to do it, make sure you make room in your budget for your financial priorities and don’t short-change yourself by putting too much focus on less important things.
So what about expenses that change from month to month?
There are some expenses that you just know are going to be a certain amount and you can plan for those without hesitation. But, when you’re first starting out with a budget, you may wonder, “How do I know how much to budget for groceries or gas or eating out?”
There’s a simple answer for that! When you first start, you might just have to make an educated guess. Remember before, when I said that the average person can eat well on about $7 a day? Consider using that as your baseline for food (both groceries and eating out).
As far as other expenses, you might need to do a little math. For instance, you could figure out how far you drive, on average, in a month. Now figure out how many miles per gallon your vehicle gets. Next, divide total distance by miles per gallon to figure out how many gallons of gas you’ll use in a month. Finally, multiply that number by the price of gas where you are to get a rough estimate of how much to budget.
So let’s say you drive 15 miles roundtrip to work every day. Your car gets 25 miles per gallon.
15×30 = 450 miles driven per month
450/25 = 18 gallons of gas
18x$4.00 per gallon = $72
In the above scenario, you would need to budget $72 per month for gas.
Of course, this is just a starting point. The best way to figure out how much you’ll need for things that vary from month to month is to just track your spending for 3-6 months and figure out your average spent. That’s what you’ll want to budget moving forward. This number will likely still vary, but it will give you a better starting point. I always like to error on the side of caution and budget more than I think I’ll need. For the first few months you use a budget, you may want to include a category to cover any overspending (I call this my “forgot to budget” category).
Deciding how much to budget in each category can be daunting at first, but with practice and consistent use of your budget, it will get easier over time. Make sure to budget first for your 4 essentials, then for your top priorities, and finally, fill in anything else that still needs to be covered. While it’s great to have your budget mapped out, keep in mind that your expenses will change from month to month as your priorities shift and you move through different seasons in your life. How your budget looks today is going to be vastly different than how it will look in a year from now. Keep adjusting as you go and know that your budget is never set in stone. Here’s to happy budgeting!