Do you know that in order to handle money correctly, we all need to know the exact percentages we can spend on every category? Once you understand why percentages matter and that it’s all about handling money within percentages, then money management will be a breeze. This is a simple finance strategy many never implement, but when they do, people will soon realize how much extra cash flow can be had. I will provide below a standard guideline for specific categories and I hope your budget is in line with what I am about to share below. Granted nothing is set in stone around here, but this will get you to understand if you need to fix a money category, that is out of whack.
If you can stay within the percentages for expense categories, this will eventually free up money for you to go over and above in the savings / investing percentage categories. By going over in the savings / investing categories you will be bounds ahead in retirement nest egg funds in no time. People will most likely shoot down an idea like strategizing income based off percentages, before even trying it out. How can one negate a financial strategy before implementing it, all because it is something completely new and different.
Why Percentages Matter:
| Category | Percentage | Category | Percentage |
| Savings / Investing | 10%- 30% or More | Medical | 5% or less |
| Housing | 30% or Less | Personal / Entertainment | 5% less or more |
| Transportation | 10% or Less | Daycare / Children | 15% or less |
| Debts | 15% or Less | Clothes | 5% or less |
| Food | 10% less or more | Travel | 0-5% |
| Utilities | 10% or less | Misc. | 0-5% |
If you can stay way under in the fixed expenses, this will allow you to increase the important categories in your life for example travel or entertainment. Wow now that sounds like a great life, traveling without the mounds of debt added to past vacations. It’s all a trade off as a budget will dictate where things should appropriately go. If you do not know how much percentage of income is going towards your cars, how can you learn to stop money from bleeding out?
If your housing is 14% based off total household income, then guess what you can now begin investing 30% of all income, as you are now aware of the extra breathing room in your budget. There’s only two ways to fix budget issues, 1. Make more income, or 2. Cut expenses. If you do not do these fixes you will overextend your budget and begin to add on debt. After a few years of overextending your bills then you will probably realize thousands of dollars in additional debt.
On average the most consistent budget busters for younger consumers is clothing, Food and Drinks, and entertainment. For a typical person making 40K a year – clothing, food, and entertainment costs a month should never be more than $350 dollars. But when you eat out every day and go out at night at least 4 times a month, hey you guessed it you spent way over $350 dollars. (Bar Tabs add up quickly)
On the positive side if you can keep most categories under the norm, while simultaneously enjoying life modestly and investing the difference you will supersede financial goals. Imagine a scenario where your housing is 15%, transportation is 10%, Debt is 10%, which equates to only 35% on the three major spending line items. This frees up 65% discretionary income for the rest of your budget. I know a person in this situation can invest and play more than the average person.
Do you now understand Why Percentages Matter?
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Rich Uncle EL
I like percentages a lot, but it's definitely hard in NYC where cost of living, particularly housing eats up such a big chunk of your paycheck. Spending 30% of your income on housing is unrealistic for most city dwellers.
My recent post 5 Real Investing Fears That Held This Financial Planner Back
Yes it can be difficult in high cost of living areas, and if housing is too high, another category will suffer or be non existent to make it all balance. But I’m sure people with roommates can achieve lower housing costs. Thanks.