Why You Should Beware Of Percentage Budgets

You have seen those percentage budget plans which deftly tell you what percentage of your budget yous should spend on which categories. Yes, they are a skilful guide, but you demand to beware that giving also much acceptance to those percentages could instruct you lot in trouble.

For example, the following percentages are recommended in Dave Ramsey’s Financial Peace University book:

Charitable giving	10-xv%
Saving	5-10%
Housing	25-thirty%
Utilities	5-10%
Food	10-xv%
Transportation	10-15%
Clothing	2-vii%
Medical/health	v-10%
Personal	v-10%
Recreation	5-10%
Debts	5-10%

Why These Percentages are Misleading

They don’t tally high or depression incomes.

Dave Ramsey rightfully points out that these are only recommended percentages too that if y'all select an unusually high or low income, they could change dramatically. For representative, a duo who earns $xx,000 annually volition inwards all probability involve to a greater extent than than xv% ($250 a month) for nutrient while a distich who earns $200,000 volition exceed much less than 10% ($1,667 a month) for food.

They may encourage auto-piloting.

It would exist an piece of cake affair to prepare budgetary decisions based on these percentages instead of your possess life inward add-on to goals. Personal finance is intended to exist personal, meaning yous postulate to carefully think through all of your income together with all of your outgo, together with construct it agree what yous wishing instead of what some recommended percentages say.

They could detract from following through with your ain goals.

Do you know your short term financial goals? Your long term goals? If non, why non? Your finances are non only dollar amounts; they represent your value system. When Bob at ChristianPF writes My Strategy for Giving Away Millions, he is planning his money (budget) based on his goals, non vice versa.

They powerfulness be a nerd trap.

Some people (nerds . . . raise your hands) love numbers to the exclusion of what the numbers represent. One can have a perfectly balanced budget on a perfectly balanced spreadsheet amongst perfectly proportioned recommended spending, but if those numbers don’t interpret to existent life, they are alone an practice inwards math . . . as well as frustration.

They could suffer a license for spending to a greater extent than you should.

If you have debt that is weighting you down, a percentage budget might give you excuses for spending money on such things as car payments and recreation instead of funneling that money into an accelerated debt reduction programme. Again: Your budget needs to reverberate your goals, non a formula.

How Percentage Budgets Can Help

They prevent overspending on large ticket items.

Many people could have avoided real estate catastrophes if they had only limited their house payments to 25-30% of the income instead of stretching every penny in order to make their theater payments. In the same way, total machine payments of non to a greater extent than 10-xv% tin opened burn downwardly give just about sanity to those who think they postulate ii or 3 new cars.

Final Thoughts

Percentage budgets displace be helpful guidelines, peculiarly to avoid overspending on big ticket items, but recollect: they are exactly recommendations. Because budgets stand upward for your goals too your values, root yesteryear establishing your financial goals too as good equally in addition to therefore tailoring your budget to fulfill those goals.

Then, together with alone as well as then, testament your money really gibe your life.

In your budget, how much importance do you give to recommended percentages? When do these percentages help? When bring they been a hindrance?

This article was originally published on Personal Finance By The Book on September 15th, 2010.