Why the 'percentage budget' doesn't always work

The idea is so enticing: 50 percent for necessities, 30 percent for wants, 20 percent for paying down debt or investing. But that doesn't fit everyone's reality.

Illustration / Tim Lee / Newscom
For low-income households, necessary expenses may well reach much higher than 50 percent. Balancing a budget requires looking at your own situation, not someone else's formula.

One topic I’m frequently asked about by readers is the idea of the “percentage budget,” something that seems to largely come from Elizabeth Warren’s book All Your Worth, which I reviewed previously.

In the book, Warren proposes a very simple budget for people to follow, based on percentages of their take-home income.

+ 50% of one’s income should go to required expenses: housing, food, utilities, transportation, and so forth.
+ 30% of one’s income should go to covering “wants” and enjoying life.
+ 20% of one’s 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 aren’t 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 “required” expenses. Let’s 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 “percentage budgeting” is that it doesn’t work well for different income levels, particularly low ones. For example, I know a teacher who earns roughly the amount described above. She’s a single mother with a house and a new-ish car. Unless there is hidden information that isn’t 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 “required expenses.” 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 – there’s only so much meat on the bone, after all. What’s 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’s 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’t 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’ve simply got to roll your own budget – 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 – as well as the pieces that made up that category – and I simply asked myself, “What can I do to curb this spending without causing too much pain in my life?”

I then repeated that over and over again until some of the changes in my life became natural.

Successful budgeting isn’t about following someone else’s specific recipe for financial success. It’s about figuring out what your real situation is, then figuring out what elements of it you can change for the better. Your life isn’t my life, nor is it anyone else’s life. Using someone else’s budget won’t really help.

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