Why I Don’t Percentage-Budget

BudgetUpThere seem to be two schools of thought on budgeting. One suggests certain percentages of your monthly net income to allocate to certain categories: no matter how much you make, spend 30% on housing, 30% on life expenses, 10% on saving, etc. So, with a net income of $1000 monthly, you’d look for housing costing $300 and save $100; with a net income of $5000 monthly, you’d look for housing costing $1500 and save $500.

There are advantages to this, especially when you’re first wrapping your head around the idea of living within your means. For example, if you make $1000 a month but are spending $600 on housing, understanding that this is far too much, percentage-wise, might be the impetus to make a change. For me, the primary advantage is that thinking this way reminds me to keep my priorities balanced. I’m not especially good at financially multitasking; left entirely to my instincts I’d fling every last penny after a single goal and then move on to another, sequentially. That’s how I paid off my student loans (actually, that’s not how I paid off my student loans during the first seven months of debt repayment…more on that in a minute) and this strategy left me with $0 in my emergency savings and a cool $2000 in my retirement account at the end of my debt repayment period, so I’m not really sure I can recommend it. I’m trying to be a little less gung-ho, and limiting my retirement savings (current priority) to a certain percentage of my income is helpful.

But even though there are upsides to percentage-based budgeting, it has one fatal flaw, particularly for higher incomes: it builds lifestyle inflation right into the model. If I’ve increased my income to $5000 a month (I wish!) why should I suddenly need to spend $1500 on housing when I was doing just fine in the $750 apartment I lived in when I made $2500? Or even the $300 rented room I was in when I made $1000? If you need incentives to claw back spending in certain categories, percentage-based budgeting can help; if what you want to do is build your net worth, it’s really dangerous.

This year, I’ve become a big proponent of funding my priorities at the beginning of the budget period. Remember that seven months of student loan payments where I wasn’t “flinging every last penny”? I started out with about $19K. To pay it down in a year, and rounding up to account for interest, I should have allocated $1666/month, steadily. But in reality, I waited until the end of every month and then paid whatever was left over after all the other bills (rent, credit card, etc.) I did make progress, but not at the rate I needed to. Before I got to my end of the month loan payment, I first was paying for whatever else I’d done that month (clothes, groceries, gas, and anything else), instead of making the “anything else” come second, after I’d paid my loan. The end result was that in the last few months, I had to pay $2500 a month, which was a huge amount on my (then) $3800/month income.

What I used to do every month:

1) pay rent
2) spend money
3) pay bills, pay off my credit card
4) allocate leftover cash to loan payments

My big turnaround came when I realized if I wanted to do something, I had to do it first, before I started spending on “incidentals,” because those can get out of hand really fast. So now, at the beginning of the month, with a net income of $3150, I’m doing this, in order:

1) Retirement savings: $1000
2) Emergency fund: $500
3) Down payment fund: $125
4) Sinking funds for medical/repair/travel/other necessary spending: $550
5) Rent/Utilities: $425
6) Transportation (car insurance/gas): $100
7) Cash (covers groceries and most small purchases, like postage or coffee): $300
8) “Slush” (the fun money, for clothing, entertainment, charity, etc): $150

The order is really important.

What I did there was decide to allocate a certain sum to savings of various kinds — long term, medium, short term. I took those off the top. Then I added in the must-pays: rent, utilities, and transportation are relatively fixed costs, with a little wiggle room around gas. (Note how I did not assume that I needed to spend $945, which is 30% of my net, on housing; instead, I found the cheapest housing that I thought would be livable, which frees up hundreds of dollars that I’m putting in savings instead.) Only then did I get down to the more elastic categories. $300 in cash is way less than I would be spending on food, household items, postage, etc, if left to my own devices, but is generous enough to allow me to eat well as long as I’m careful. I also gave myself some fun money. So the “incidentals” are in there and I don’t feel guilty about spending that money, but it’s strictly limited by how much was left over after I set up my savings categories, instead of being in the driver’s seat.

This is working really well for me; it’s a comfortable point somewhere between percentage-based budgeting and the Frugalwoods’ excellent habit of just not spending money ever. (Which I greatly admire, but am not up to myself.)

Are there advantages to percentage-based budgeting that I’m missing? Is it obvious that I use YNAB now and love it?

brokeGIRLrich

29 thoughts on “Why I Don’t Percentage-Budget

  1. Cindy says:

    When I first really started looking at my budget, I compared it to the “50/30/20” budget (50% needs, 30% wants, 20% savings/debt payoff), more just to see if my numbers were out of whack. I think they can be helpful in that way. But my actual budget is in amounts, not percents. My budget isn’t as broken down as most people’s. I get paid weekly. Each week, $X goes into my expenses account, to cover all my bills (including irregular bills, like insurance). $Y goes into my savings, for whatever my current priority is (last month if was the e-fund, this month it’s for extra payments on my student loan). Whatever’s left (around $120/week) is for fuel, groceries, fun, and any other spending I have. I’ve tweeked the numbers a lot along the way, and if I get a raise or something like that, the amount going towards Y (i.e. savings/debt) increases. That way I’m not succumbing to lifestyle inflation by adding more to my spending or expenses.

    1. thesingledollar says:

      Yes, that sounds like exactly what I do — just less broken down, as you say. Neither of us is assuming that we have to spend 30% on wants — the wants are getting pushed to the bottom of the list, and they’re “whatever’s left over” rather than a fixed amount.

  2. I LOL’ed at the frugalwoods not spending money ever comment. I sometimes wish I could be like them but alas, I have to find a middle ground that works for me too. I think you’ve done a great job doing that for yourself so great job!

    1. thesingledollar says:

      Thank you! I think they are awesome, but I’m just not quite that hardcore 🙂

  3. Strandedrocks says:

    I do the same, I skim my savings right off the top and live on what’s left. But I still need to itemize and keep track of the rest or else I go overboard with my spending. I had never really thought about percentage based budgeting accommodating lifestyle inflation and you are absolutely right. The more I make the more I think I would be able to talk myself in to living in a more expensive because it’s still within the 30% limit.

    1. thesingledollar says:

      Yeah, I totally itemize and track the rest — just to be sure I’m being basically “good” — but I’d also be very prone to upgrading when I don’t need to 🙂

  4. Every time I hear the whole 30% of your budget to mortgage/rent I shake my head. As you know ours is like closing in on 50% – cray cray!

    1. thesingledollar says:

      Oh man, I lived in NYC for 11 years. I definitely paid at or over 50% of my income almost every single year for rent. It was awful and I’m trying to make up for it now by paying about 13%.

  5. We’ve used %s to keep our housing and spending in check. We used the %s first to get our spending to an “acceptable” level, then we improve where we can to meet our goals on our timeline.

    This year we’ve added more to some lifestyle categories of our budget, which I’m a bit sensitive about at this point, but I know we’ve cut costs elsewhere so it’s offset a bit. We’re still on track to reach our mortgage payoff goals, but it feels weird adding in “buying something unbudgeted” or a separate “entertainment with friends” categories.

    1. thesingledollar says:

      Yeah, I think that’s the right way to use %s — as a more or less hard limit rather than an open invitation. As for the lifestyle categories, I think that if — like the Frugalwoods — you have a very short timeline for a major goal, it’s totally fine to eliminate entertainment etc. But in my case, major goals like retirement and owning a house are really long term because, given my relatively low salary, those goals are decades out. I could maybe chop a year or two off the timeline by cutting back even more, but honestly, I don’t want to do that for the next 28 years in order to retire two years early! I suspect the same is true for you; allowing a little slack in a budget is almost certainly a good thing unless you’re hyper-focused on a short-term goal or, of course, in debt/dire poverty.

  6. Looks like you’ve got a great system worked out! I totally agree with you that strictly percentage based budgeting can seriously build the lifestyle inflation right in–oh the horror ;)! I think it’s all about what you need and want to allocate your resources towards, not what a % says you should do.

    Many thanks for the shout-out–I really appreciate it :)! And, for the record, we definitely do spend money, just not a whole lot of it 😉

    1. thesingledollar says:

      It’s taken me a while, but I think I’m getting there with establishing a system that works for me 🙂 I loved your post on not budgeting, though — like I said in another comment, I think it speaks to the intensity with which it’s possible to pursue one singular goal. Budgeting works better, I think, when one has (like I do right now) multiple short-term goals. I didn’t budget much when I was only focused on paying off my student loans and not on anything else.

  7. I’m pretty similar (fund priorities first). If I make it through the month without spending my entire discretionary budget, the remainder also goes into savings. It works pretty well, as I often don’t spend much except around the holidays.

    I don’t consider myself frugal, but I’ve just been conditioned to spend less by virtue of not having as much before and maybe as a rejection of my prior habits. Which was basically the reverse order of your priority list.

    1. thesingledollar says:

      I’m hesitating between moving anything left over to savings, and letting it accumulate in a slush sinking fund. Right now, I’m leaning that way; it’d be nice to fund a few larger fun purchases eventually. Also, I think whatever gets you to spend less is good, whether it’s a mindset change or a response to practical constraints 🙂

  8. This sounds terrible but I don’t really budget. Almost all our expenses are flat month-over-month (or at least consistent, like a car insurance payment that happens once every six months). I review our spending but don’t really “allocate” in any sort of way. I also have our investments & savings set up on auto-deposit so I don’t really think about it.

    1. thesingledollar says:

      I don’t think it sounds terrible as long as you’re going in a good direction — that’s basically the point of the Frugalwoods post I linked to. They don’t budget either; they have lots of things automated and otherwise just try to spend as little as possible. I think budgeting is more helpful when, without it, you tend to slide into spending all your available cash (and that was a problem I had for a loooooooooong time.)

  9. Mrs. PoP says:

    I think you hit the nail on the head with the weakness of the percentage budgets – lifestyle inflation. We have seen our income grow pretty significantly over the course of our marriage (by almost a factor of 3 between what it was in Year 1 and what we think it’ll be next year (year 6)) and it just doesn’t make any sense why the things we had in year 1 would no longer be sufficient just because we earn more now!

    1. thesingledollar says:

      Yep — percentage budgeting is only good for reining yourself in, not as an actual guide to how you should ideally be living. Unrelatedly, what an awesome income increase; I need to get going on that kind of thing! 🙂

  10. Alicia says:

    You’re totally right! I think it’s a good starting point if you’re overspending, but whether you make $100,000 or $50,000, the cost of living life doesn’t change that much. There’s just more gravy in the 100k budget than the $50k one.

    1. thesingledollar says:

      Yep. And more gravy is always a good thing 🙂

  11. ARBM says:

    I’m still learning how to budget, but I appreciate reading about how you have set up your system, as I think I will need to tweak my system after our first attempt at budgeting this month…

    I posted my budget in percentages on my blog, but the spreadsheet I have on my computer is in dollar amounts, so that is how the percentages were determined. I am way over the 30% for housing. Whoops. But I guess to be fair to myself, we are in a new situation with my fiance heading back to school…

    1. thesingledollar says:

      Oh, good luck with the budget! It gets a lot easier over time as you figure out what works for you. I’ve been at this nearly a year and I’m just settling into a system that really works well after a number of false starts. (They were all OK systems, but the one I have now is really smooth and well-suited to my style.) I’m glad this was useful to you. And yeah, sometimes the housing numbers are off depending on your situation — like, I lived in New York for 11 years. I generally spent around 50% of my income on rent (eesh!) Thanks for commenting.

      1. ARBM says:

        Thanks, I can definitely see that my budget will require some work before I can get it to work for us, so I may adopt some of your methods…

        I wish I had an excuse like living in New York for my high housing costs, but mostly it is that we bought a house in a nice area, so our mortgage is pretty big, and my income is down a bit this month, and so is my fiancé’s.

        And thanks for coming to visit my blog and checking out my budget!

  12. Mel says:

    I found percentage based budgeting doesn’t really work for me either. Especially in NYC, where my rent was about 50% of my take home pay – and that was the norm for most people.

    1. thesingledollar says:

      Oh God, New York, how much I do not miss you and your insane rents. I routinely spent 50% there (sometimes more.) Hopefully never again.

  13. We don’t use percentages either (besides for our 15% to retirement). However, how you prioritize your expenses struck a chord with me. Our current goal is to pay off our mortgage, within the next two years. Currently we budget as little as we think possible to our expenses and put everything extra towards our mortgage. However, your point made me wonder if we put the mortgage at the top of the list. Say, we want to pay it off in 20 months, so in order to do that we need to pay $2800/month to it and then just budget with whatever is left over… hmm… I wonder if doing it this way would be better for us. Thanks for encouraging me to see it from a different perspective! 🙂

    1. thesingledollar says:

      Thank you! I loved your budget post too — I guess it’s a January classic 🙂 You could play with the percentages a little — if $2800 leaves you with so little that you can’t buy groceries, you could say “OK, 24 months instead of 20” and just keep playing with it until you find something that works.

  14. If you’re only making 1k a month (been there) I’d argue that this model doesn’t work either depending on where you are in your life. If you’ve got a family, your kids would be living in a crap hole going to awful schools if you can even find a place that houses enough people for $300/month. At that low of an income, I’d be striving to build income before using this model.

    1. thesingledollar says:

      I’ve been there too! But I didn’t have kids (still don’t.) It’s easier to manage when you can rent a room in someone else’s house/apartment (although $300 is very low even for that, in most places. When I made $1000 a month, I had a room for $600 in New York.) Anyway, I agree with you — at that level building income is a must.

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