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Read: 5 Critical Questions You Need to Ask Yourself Before Creating a Budget.Instead of using that extra income to only pay-off debt or save for a down payment on a house, which is only benefiting one category, a percentage-based budget uses that money to increase all categories (more money for food, required expenses, debt, and saving). If you get a raise at work or a bonus, your take-home pay has increased, which means all categories in your budget benefit. There is a mental boost thinking about percentages rather than a specific dollar amount.Īll spending categories benefit when there are life changes.
If you think about your food budget as 10% of your income, mentally, it seems limitless somehow. When you dedicate a specific dollar amount to a category ($500 for food), it feels limiting. Some people believe that having a percentage-based budget feels less restricting. It uses and relies on the percentage of your income to determine how much you can spend and where. Read: How to Create a New Budget Every Month: A Detailed Step-by-Step Guide.She suggests people spend 50% on required expenses (housing, food, utilities, transportation, etc.), 30% on “wants,” and 20% should be spent on paying off debt or saving.īoth of these examples make sense on paper, but the real question is does using these types of percentage restraints really work? There are a lot of articles out there that give you a very clear outline of where you should be spending your money, and what percentage of your take-home income should be spent on predetermined categories (saving, debt-payoff, and required expenses).įor example, Dave Ramsey recommends 10-15% on food, 25-35% on housing, 10-15% in savings, and 10-15% on charitable giving.Īnother example is Elizabeth Warren's book All Your Worth.
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One topic I'm frequently asked about by readers is “percentage budgeting.”