Budgeting: Utilizing Percentage Benchmarks

May 2, 2013

How much is too much to spend on rent? A mortgage payment? How about utilities and insurance? The truth is, there isn’t a one-size-fits-all number to answer any of these questions. It all comes down to what you earn, what your debts and financial responsibilities are, and where your financial priorities lie.

That’s why some experts lean heavily on benchmark percentages to help individuals with drastically different financial situations determine if they are on track with their budget.

Elizabeth Warren, Harvard University bankruptcy expert and new U.S. Senator, believes in the 50/30/20 rule – 50% of your income should be spend on “needs” (housing, utilities, transportation, etc.), 30% should go toward “wants,” and the remaining 20% should be used for debt repayment or planning for the future (retirement, savings, etc.).

However, a post on The Simple Dollar aptly points out how easy it is to over-exaggerate your needs and end up with a much smaller chunk than is suggested for wants and saving for the future.

So, perhaps the answer is drilling down the category of needs in order to really tell how smart you are being with budgeting your money. Here is the general consensus I found among experts when it comes to budgeting by percentages.

Housing: 25-28%
Mortgage Payments (including property tax and home insurance) / Rent

While there isn’t a precise number that experts seem to agree on, the general consensus is that your housing costs should fall between 25-28% of your income. However they vary greatly on whether this should be your gross income or net income. Dave Ramsey believes that you should spend no more than 25% of your net income. Others lean towards taking the percentage from your gross income.

Suze Orman suggests determining if you are equipped to buy a house by taking your rental costs and adding an additional 45% which would cover maintenance, property tax, etc.

Utilities: 5%-10%
Phone, electricity, water, Internet, gas, trash

This category is relatively straightforward and most experts agree on the 5-10% benchmark – although this article on The Nest suggests going as low as 2%.

Transportation: 10-15%
Gas, insurance, maintenance, license, registration, or public transportation passes

Dave Ramsey suggests keeping all transportation costs at 10-15% of your net income. This does not include your car payment (this should go in in the “debts” category), but does include everything else you need to keep your car running from year to year.

This likely means you’ll have to break down your insurance premium, registration costs and average maintenance to get an accurate monthly allowance.

Food: 5-15%
Groceries, meals in restaurants

While Dave Ramsey suggests the broad 5-15% range, Kiplinger leans towards the higher end at 15%. Take note that this includes all food from groceries, to that $1 you spend at the snack machine every day.

This may seem like a large amount, but studies have shown that the average American actually spends less of their disposable income on food (including eating out) than those in other countries.

Saving: 5-10%
Emergency savings, big-ticket items

Suze Orman is constantly stressing the importance of building up an emergency savings account that covers at least 6-8 months’ worth of your expenses. On the other hand, David Bach, author of The Automatic Millionaire, suggests setting aside 3 months’ worth of living expenses.

If you’re starting from square one, this could take a substantial amount of time to accumulate, but if 5-10% is what you can afford right now, it’s a great place to start.

Retirement: 10-15%

Dave Ramsey actually includes retirement in his “savings” category, but his suggested rate of 5-10% for everything (emergency savings, retirement, college, big-ticket items) seems less than meager compared to what other experts suggest.

Former Money Magazine editor Walter Updegrave suggests starting at 10%, but putting away more if you are able and want to ensure your financial security well into your later years.

Medical: 5-10%
Health insurance, copays, medication, medical bills, disability insurance

This might seem like a small percentage considering the rising costs of healthcare, but the average American family is already managing to stay under the 10% mark. In fact, the Bureau of Labor Statistics found that the majority of Americans spend approximately 6.56% of their income on this expense.

Debt Repayment: 5-15%
Car payment, credit card debt, student loans (everything you owe except your mortgage)

According to Elizabeth Warren and her 50/30/20 rule of thumb, any minimum payment counts towards your “needs” (the 50% category) and anything over the minimum counts towards your debt repayment (the 20% category).

Dave Ramsey, on the other hand, bunches all consumer debt payments – everything you owe except your mortgage – into the debt repayment category and suggests that 5-10% of your net income goes towards that expense.

Personal/Recreation: 5-15%
Entertainment, vacation, subscriptions, gifts

This is another category that without an agreed upon percentage, but experts seem to agree that “wants” should fall between 5-15%. Some include dining out in this category, but most bunch that in with the general food category.

However, this does include alcohol on nights out, movies, clothing above and beyond what is needed, vacations, and anything else that you could easily do without.

It’s important to keep in mind that everyone’s financial situation is different. If you don’t have any consumer debt, then you are likely to have more to go towards the savings category or the personal/recreation category.

However, these percentages are a great jumping off place for creating a healthy budget and improving your overall financial well-being.

If you’d like to see where your money is being spent each month along with a percentage conversion, check out this great budget calculator from the Washington Post or Dave Ramsey’s online budgeting software.

Do you follow percentages when creating your budget? Share your experience and tips in the comments.