One thing you can say about Dave Ramsey is that he keeps things simple.
Its little steps are easy to understand. Like your other rules, like how much to spend on a car. (Answer: the total value of your vehicles must not exceed half of your income).
So what does Dave say about recommended family budget percentages?
And what is your ideal family budget like?
Family Budget Percentages Recommended by Dave Ramsey
Ramsey’s 11 budget categories, along with percentages, are:
- Give – 10%
- Savings – 10%
- Food – 10% to 15%
- Public services: 5% to 10%
- Housing costs – 25%
- Transportation – 10%
- Health – 5% to 10%
- Insurance: 10% to 25%
- Recreation – 5% to 10%
- Personal spending: 5% to 10%
- Various – 5% to 10%
Here’s a breakdown for each category, based on advice from Dave Ramsey:
- Giving: Ramsey recommends giving 10% of your monthly income to worthy causes.
- Savings: You save 10% of your income for retirement, which ideally lies within a 401 (k) or IRA.
- Food: includes both shopping and food away from home.
- Public services: cell phone, cable, internet, gas, and electricity.
- Housing costs: rent or mortgage payment, along with property taxes, home or renters insurance, home maintenance, HOA fees, and PMI.
- Transportation – Any transportation costs, including public transportation, car insurance, oil changes, car payment, gas, DMV fees, and parking.
- Health – Health care and medical bills (not including health insurance premiums), such as co-pays for doctor visits, prescriptions, and dental care.
- Insurance: life insurance, health insurance, and disability insurance. Auto insurance and home insurance fall under the categories of transportation and housing.
- Recreation: This is your fun money. Any lifestyle expenses, such as gym memberships or children’s activities, as well as entertainment expenses such as Netflix, Hulu, sporting events, concert tickets, babysitters, and travel.
- Personal expenses: personal care, haircuts, Amazon shopping, clothing, shoes, home furnishings, home decor, etc.
- Miscellaneous: the category “things you forgot to budget for”.
And the debt? One category missing from the list above is personal debt. Ramsey recommends using as much of your non-mortgage debt as possible, such as student loan payments, personal loans, or credit card bills.
That requires minimizing your expenses in other categories (in addition to making more money) and putting in whatever you can to pay off your debt. Also, according to Ramsey, you shouldn’t start saving for retirement until you have a fully-funded three-month emergency fund.
Another note is that these expense categories are just one way to organize your budget. There are other categories of budgets that you may want to include and other ways that you may want to classify your expenses. And some people’s expenses may not meet these guidelines, such as school supplies if you have children or alimony if you are obligated to pay it.
Taking myself as an example: I prefer to save much more than 10% of my income. As a self-employed person, my health insurance costs are very high. And with a kid in preschool, so are my education costs. On the other hand, my transportation costs are much lower than average since I work from home and have two paid cars.
The details of your financial situation do not have to perfectly match this chart. The important thing is to develop an individualized budget that works for you and your family.
Dave Ramsey’s Family Budget Percentage Analysis
The idea is to use these budget categories as a way to analyze your current monthly budget.
As such, the first step in making these budget categories useful is comparing them to your actual current spending. The emphasis is on the real thing because research shows that there is a huge difference between what we say and what we do.
This is called a social desirability bias. It means that we tend to answer questions about ourselves in socially desirable ways. A fun exercise to see how this bias works in practice is to estimate your current monthly expenses and then compare that estimate to the actual data. For a faster experiment, try only one category. For example, compare what you think you spent on eating out last month with what you spent at restaurants.
Simple ways to obtain this data include:
- Look at last month’s credit card statements and insert the details into a good budget template.
- Use a good free budget app and have the app automatically download the above transactions. Dave Ramsey Insurance has the Every Dollar budget app. The app itself has excellent reviews. However, to sync your transactions automatically, you have to pay for the pro version (which costs $ 99 a year).
The goal is to get real results, showing exactly what you spent to the last dollar.
Free Budgeting App Recommendation: Truebill Budget & Bill Tracker. Truebill, which is both a budget tracker and an invoice reduction service, has a very clean and easy-to-use budget app. The budget app is 100% free, it syncs your transaction automatically, and it also allows you to keep track of upcoming invoices.
How to analyze your monthly budget (and create your own)
Once you have this information, you can use it to make good financial decisions. Use these questions as a starting point:
- What areas of my current budget are within the recommended guidelines?
- What areas of my current budget are outside the guidelines?
- What categories do my current spending habits fall into?
- In which categories are my expenses flexible or variable?
- Will any categories increase in the future and why?
- Will any category decrease and how?
- What categories do I want to increase?
- What categories do I want to decrease?
If you take the time to answer these questions, make sure it’s not wasted effort. Keep identifying three to five goals you want to achieve based on your knowledge.
- Reduce my costs of eating out to $ 75 per month
- Save at least 10% of my gross monthly income
- Get rid of debt in 18 months
- Reduce my cost of living to 25% of my total take-home pay
Budgeting system recommended by Dave Ramsey
Having a budget is one thing, but sticking to a budget is an entirely different ball game. That’s where Dave Ramsey’s recommended budgeting system comes in.
To help with the required discipline, Ramsey suggests using an assigned spending plan. In short, an assigned spending plan is a budget that allocates expenses by pay period.
For example, if you are paid on the 1st and 15th of each month, you will have a budget for each period:
- From the 1st to the 14th of the month
- From the 15th to the end of the month
From there, you will create a zero-based budget. That means every dollar earned within that time frame will be allocated. There are some finer details to this method, so use this step-by-step guide to get started.
Other budgeting methods
The allocated spending plan works well to reduce your household living expenses. But it can be quite tedious, especially if this is your first time budgeting.
If that’s the case, three simpler budgeting methods include:
The reverse budgeting method
To put it simply, reverse budgeting means paying yourself first. Do this to finance the most important goals you have in your life. After that, whatever money is left after your bills are paid can be spent on whatever you want.
The 50-20-30 Budgeting Method
The 50/20/30 method is a popular budgeting tool that allows you to easily divide your finances into three different sections.
The method recommends the following:
- Use 50% of the money you earn for necessary expenses, like lodging and transportation.
- Use 20% of your income to gain financial traction
- Lastly, 30% of your income can be used for anything you want
The envelope budgeting method
If you are looking to save money, like drastically reducing your expenses, the budgeting method you would try is the envelope system, also known as the envelope budgeting method.
The envelope system is a cash budgeting method. How does it work?
- Determine your household income
- Decide on a budget amount for each category
- Create envelopes for each budget category
- Fill your envelopes with cash according to the budgeted amount
- Spend only cash, knowing that you can only spend what is inside your envelopes
Yes, this budgeting method is a bit more tedious. However, it works to change behavior. If that seems like too much, consider using the envelope system for the two or three budget categories that always seem to get out of hand.
Summary: Percentages of the family budget
We all know that personal budgeting gets a bad rap. But if you want to improve your financial situation or need money as soon as possible, it is one of the most important things you can do.
Budgets tell your money where to go. Done right, they give you more freedom with your finances, not less.
That’s because they give you the power to decide ahead of time what is important to you. A good budget will help you better allocate your money toward your short-term and long-term goals, help you identify areas where you can cut down on wasteful and unnecessary expenses, and help ensure that you are saving and investing for a stable future and prosperity.