Budgeting "How Tos"Savings&Banking

How To Set Budget Percentages (3 Practical Scenarios)

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Are you working on setting up a budget? Before you get started, it’s a good idea to establish some budget alert threshold rules. It is typically recommended that you establish certain percentages for different areas of your budget.

Of course, we all have different goals and different incomes/expenses so it stands to reason that your budgets may not look exactly the same too.

Maybe you’re at a point where you’re trying to save to purchase a new home.

Or perhaps you have a really tight budget and simply want to be able to create a living expenses budget and establish an emergency savings fund.

Luckily, there are a lot of free budget spreadsheets or free UK budget planner tools out there.

The thing is — before you even consider any of these tools, it’s worth having a strategy. In this article, we break down some key budget percentage strategies you can use today.

Standard Budget Percentages

On average, there is a standard recommendation for budget percentages and when you look up a free budget spreadsheet, it’s most likely going to point you towards the 50-30-20 budget percentages. 

Now, keep in mind that this is not set in stone. The 50-30-20 budget simply may not work for your needs or your income and expenses but it can be a good goal to work for  – or even a good starting place to create a budget spreadsheet.

So what exactly is 50-30-20?

These budget percentages recommend setting aside 50% of your income for have-to items. These are your non-negotiable things or required spending. It might be debt or a credit card payment, it will also contain things like housing and food and utilities. 

Then you have 30%. The 30% in this budget percentages model is meant to be for your optional spending. Think of this as your place for extras. 30% of your income can be allocated to things like entertainment, shopping, eating out, getting your nails done, hitting up the arcade, or anything else that you like to do as an “extra”.

Then, you have the remaining 20%. When you plan like this, the goal is that the remaining budget percentages of 20% will be allocated to savings. This could be retirement savings or perhaps something like emergency savings. 

We do totally understand that this particular plan may not be feasible for everyone. Some people find themselves barely scraping by or perhaps saving for something specific so your percentages are more customized to what you need or want to accomplish with your budget planning cycle.

Setting Budget Percentages

The above budget percentages plan is what you might find in a free budget planner but you might need to break it down more. Sometimes, it’s easier to create a budget spreadsheet when you break it all down by category. For a deeper drill down into this, check out our post on 11 expenses you need to always include in your budget.

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While every category will fit somewhere inside of those tiers, it could be easier to keep track of your budget percentages by assigning a percentage to each category that you use. A free budget planner should allow you to customise it in this way or it might even have recommendations for percentages too. 

For example, your mortgage or rent is most likely going to be the highest percentage when you create a budget spreadsheet. 

Here is a good example of the ranges you might want to plan for in your free budget spreadsheet. 

  • Housing – 25-35%
  • Food – 10-15%
  • Transportation (including leases or car payments) – 10-15%
  • Insurance costs for home, life, car, and health – 10-20%
  • Utilities – 5-10%
  • Entertainment – 5-10%
  • Personal Use – 5-10%
  • Savings – 10-20%

These are just some basic categories that a free budget planner might have. You might also have things not covered here, like a credit card payment or perhaps student loan debt to consider.

In the food category, we primarily mean a grocery budget and other meal options like eating out would fall under entertainment really when you create a budget spreadsheet.

How to Choose Your Percentages

As we mentioned earlier, not everyone has the same needs so while a free budget spreadsheet is helpful in categorising and putting together a plan, you need to be able to tailor that plan to your needs.

Your criteria to create budget spreadsheet percentages are going to be based on what you’re trying to accomplish, so let’s cover some of those things.

Scenario 1: Little To No Savings, No Emergency Fund.

If your goal with a free budget planner is to start getting an emergency fund established, that’s a great place to start.

While experts often recommend 20% of your income going to savings, we know that this is not always feasible. However, it’s a good idea to see where you might be able to rein in spending or make changes so that you can establish an emergency fund.

If you don’t feel like you can hit that 20% threshold but want to start saving for emergencies, start with a small amount. Once you get your spending and income listed out, what can you adjust?

Maybe you didn’t realise you were spending so much on fast food each month. Can you cut back?

Next, start looking for things you can adjust. Check out your cell phone plan, streaming services, cable and internet packages. Can any of these be tinkered with to save you money?

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If you don’t have a lot of extra and you want to establish an emergency fund, try starting with 5% to get going. A little bit will add up if you really do set it aside for emergency use only.

Scenario 2: Secure Job & Emergency Fund Established. Looking To Save For A Home

Maybe you want to start preparing for buying a home. In this case, you probably need to allocate as much as you possibly can to your savings to establish a fund for things like the deposit as well as inspections, tax, insurance, mortgage fees, and more.

In this scenario, we recommend boosting your savings percentages up to 25-30%. It’s a little more aggressive due to the nature of property prices. This will likely be the largest expense of your lifetime, and one that will change the very course of your financial future.

Since we’re going aggressive, this may require you to find places to cut back. Lifestyle changes like not hitting the clubs every weekend might have to be made. More eating at home, less Uber Eats. That sorta thing.

You can create budget spreadsheet totals that are mindful of this goal and you will probably also be more conscious of “extra” spending, holding yourself accountable for shopping, going out, entertainment, and other things that you might be able to reduce until you get that home purchase you’re dreaming of. 

With that in mind, we’re certainly not telling you that you can’t still enjoy some of your money. But if you want to really focus on the house goal, you will cut back where you are able in order to save as much money as possible.

The home purchase is a standard goal so once it’s completed, you can reallocate your budget to fit your needs again. 

Scenario 3: Secure Job & Emergency Fund Established. Saving to Invest & Retire Early.

If you are saving to invest, we recommend sticking to the tried and tested 20%. This 20% should include retirement savings, emergency savings, and any extras for investing.

If you want to be more conservative, you could invest with just your retirement savings. Given that you’re already in a good position with your emergency fund established and a constant stream of income coming in, you can adjust the percentages to go as light or aggressive as you see fit. Feeling super bullish on an asset class? Bump that 20% up to 25-30% if you’re fine with cutting back some of your optional expenses.

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Regardless of how bullish you are, do not ever put yourself in a position where you are using your emergency fund to invest in speculative assets.

Savings Prioritisation (A 5-Step Checklist)

Many ask the very valid question, “how should one prioritise and allocate savings depending on where they’re at?”

Here is how we recommend prioritising your finances in order of importance.

  1. Get an emergency fund established and funded (and continue to build on it when able)
  2. Invest in an IRA or some sort of retirement fund. Take advantage of any employer matches available to you. 
  3. Start repaying debt, getting rid of the worst debt first (credit cards and high-interest rates are terrible)
  4. Cut back on excess spending and continue to pad 1, 2, and 3.
  5. Focus on you and your goals!

Notice how it all begins with an emergency fund? It’s not called a safety net for no reason. Once you have that sorted, begin to tackle steps 2 through 5.

It will most definitely require some effort and willpower on your part. For some people, getting your budget to the percentages you want or need to see requires some sacrifice and redirection.

We often don’t realise just how much we spend until we break it down and take the time to look at the details.

Final Thoughts

We hope that you find this guide to creating a budget and honing in on budget percentages is helpful for your needs. Understand that while there are category recommendations for percentages, your budget is going to reflect your own needs as well as your goals. 

When you’re not quite sure where to start, to create budget spreadsheet details, try a free budget planner to help you out. This type of technology puts everything in front of you and it holds you accountable for your actions as well. 

What is the top area that you can improve your budget? 

About author

Fully qualified CISI Investment adviser for 5 year. Managed UK private client portfolios.
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