Why the 'percentage budget' doesn't always work
One topic I鈥檓 frequently asked about by readers is the idea of the 鈥減ercentage budget,鈥� something that seems to largely come from , which .
In the book, Warren proposes a very simple budget for people to follow, based on percentages of their take-home income.
+ 50% of one鈥檚 income should go to required expenses: housing, food, utilities, transportation, and so forth.
+ 30% of one鈥檚 income should go to covering 鈥渨ants鈥� and enjoying life.
+ 20% of one鈥檚 income should go to paying off debts and saving for the future.
That budget has a lot of appeal to it, and people often wonder why they 补谤别苍鈥檛 doing it. For some people, it really does work.
However, there are some issues with it. One challenge with it that I see is that people overload their 鈥渞equired鈥� expenses. Let鈥檚 look at an example.
If your household is bringing home $50,000 a year and you have a $1,400 a month house payment, $500 a month in car payments, $200 a month for insurance, $500 a month putting food on the table, $100 a month on gas, $200 a month on electricity, and $200 a month on other utilities, that adds up to almost $40,000 a year.
In terms of percentages, such a household budget looks like this:
+ 80% spent on required expenses
+ 20% spent on wants
+ 0% spent on paying off debts or saving
In other words, the biggest problem with such strict 鈥減ercentage budgeting鈥� is that it doesn鈥檛 work well for different income levels, particularly low ones. For example, I know a teacher who earns roughly the amount described above. She鈥檚 a single mother with a house and a new-ish car. Unless there is hidden information that isn鈥檛 readily clear, her household budget likely looks something like the budget described above.
The solution is easy on paper but very, very difficult in practice: eliminating 鈥渞equired expenses.鈥� How does one do that? Frugality, really. Frugal tactics seek to reduce the amount that people spend on energy, on food, on other utilities, on automobiles, and so on.
However, there comes a point where frugality no longer helps 鈥� there鈥檚 only so much meat on the bone, after all. What鈥檚 next? Downgrading your home. Selling your new-ish car and getting an old one with good gas mileage and cheap insurance. In reality, those are steps that people rarely take.
Here鈥檚 the truth: every budget, even a simple one like this one, is so deeply tied to the personal experience of the person creating it that it simply doesn鈥檛 apply to everyone. Following the budget that someone else has prescribed for you (without actually evaluating your specific situation) rarely works.
What does work? You鈥檝e simply got to roll your own budget 鈥� in a way.
My technique for doing that was pretty straightforward. I just kept track of every dime of expenses for a month, then sat down and sorted the receipts and cancelled checks and credit card bill entries into groups that made sense to me. Then, I looked at the total of each category 鈥� as well as the pieces that made up that category 鈥� and I simply asked myself, 鈥淲hat can I do to curb this spending without causing too much pain in my life?鈥�
I then repeated that over and over again until some of the changes in my life became natural.
Successful budgeting isn鈥檛 about following someone else鈥檚 specific recipe for financial success. It鈥檚 about figuring out what your real situation is, then figuring out what elements of it you can change for the better. Your life isn鈥檛 my life, nor is it anyone else鈥檚 life. Using someone else鈥檚 budget won鈥檛 really help.
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