Why You Should Beware Of Percentage Budgets

You have seen those percentage budget plans which deftly tell you what percentage of your budget you should top on which categories. Yes, they are a skillful guide, but you convey to beware that giving likewise much acceptance to those percentages could begin you inward problem.

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

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

Why These Percentages are Misleading

They don’t fit high or low incomes.

Dave Ramsey rightfully points out that these are alone recommended percentages too that if yous have got an unusually high or low income, they could modify dramatically. For instance, a brace who earns $20,000 annually volition inwards all probability demand to a greater extent than than 15% ($250 a calendar month) for food patch a duo who earns $200,000 testament spend much less than 10% ($1,667 a month) for food.

They may encourage auto-piloting.

It would live an slowly affair to build budgetary decisions based on these percentages instead of your ain life every bit well every bit goals. Personal finance is intended to agree out personal, important you lot involve to carefully think through all of your income inward improver to all of your outgo, together with larn inwards fit what you lot desire instead of what nearly recommended percentages say.

They could detract from next through alongside your ain goals.

Do you know your short term financial goals? Your long term goals? If non, why non? Your finances are non but dollar amounts; they represent your value organisation. 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 mightiness concur out 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 alongside perfectly proportioned recommended spending, but if those numbers don’t translate to existent life, they are solely an do inwards math . . . too frustration.

They could survive on a license for spending to a greater extent than 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 project design. Again: Your budget needs to reverberate your goals, non a formula.

How Percentage Budgets Can Help

They forbid 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 theatre payments. In the same way, total motorcar payments of non to a greater extent than 10-fifteen% give notice give closed to sanity to those who holler upwards they demand ii or iii new cars.

Final Thoughts

Percentage budgets tin give the axe endure helpful guidelines, peculiarly to avoid overspending on large ticket items, but holler upwardly: they are only recommendations. Because budgets represent your goals too your values, root past times establishing your fiscal goals in addition to thence tailoring your budget to fulfill those goals.

Then, together with exclusively then, testament your money really tally your life.

In your budget, how much importance do y'all give to recommended percentages? When do these percentages aid? When have got they been a hindrance?

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