How to Determine Budget Percentages to Meet Your Money Goals

Geoff Williams

If you're always frustrated that your budget never quite works out the way you want it to, maybe your problem lies in the straightforward concept and yet murky world of budget percentages.

That is, perhaps you're thinking in dollars and not sense. You know you're going to spend a certain amount of money in a given month on groceries or gas, for instance, but you haven't asked yourself if that's too high of a percentage for your budget. For instance, it may seem reasonable to pay $500 a month for your grocery bill, but if that was 45% of your monthly income, any economist would tell you that you're spending too much and need to start clipping coupons and looking for sales.

Budget percentages can help improve your budget and cash flow, and reduce a lot of financial stress.

[See: 9 Secrets to Save Money on a Shoestring Budget.]

Breakdown of Budget Percentages

There's no right or wrong way to do this. Nobody's going to haul you into a financial jail if you're breaking these rules, but many experts suggest splitting up your budget in this way:

-- Housing: 25%

-- Insurance (including health, medical, auto, and life): 10%

-- Food: 10%

-- Transportation: 10%

-- Utilities: 10%

-- Savings: 10%

-- Entertainment (anything fun): 10%

-- Clothing: 5%

-- Miscellaneous: 10%

Again, that's one way to do it. Some financial experts suggest donating money, which may ultimately be the "miscellaneous" category. Or maybe "miscellaneous" should be "debt," if you have a lot of debt payments, like credit cards and student loans. If it makes things easier for you, you could eliminate "utilities" and lump them in with " housing," and possibly make the percentage higher, from 25% to 35%, since the utilities go hand in hand with where you live.

[See: 6 Ways to Treat Yourself on a Budget]

Budget Guidelines

As you put together your budget percentages, you'll want to consider the following:

Think of these categories as buckets. That is, you may want to count your mortgage payment in the housing department, but also your property taxes, homeowners association fees and really anything that contributes to your expenses of keeping a shelter over you and your family.

The idea here is that you want to try and account for as many regular expenses as possible and put them in some category -- so you are keeping track of everything. Some things that can't be categorized, like the goofy knickknack you bought at a flea market, would likely go into "miscellaneous."

Make sure the math adds up. Kind of obvious, but it should be said. If your budget percentages add up to, say, 120%, or even 101%, and you follow the financial path you've laid out, you'll struggle with your cash flow and will lose money every year.

For instance, Stephanie Hammell, a wealth advisor of Provence Wealth Management Group, suggests that everybody's housing percentage -- which would include things like housing association fees and property taxes -- should be less than or equal to 28%, as opposed to 25%.

"If you're above that, you know that you better be budgeting less in other areas to make up for that shortfall," she says.

Be realistic. You might be tempted to eliminate "entertainment" or reduce the clothing budget to next to nothing. That may work for a while, but you're probably setting yourself up for failure, according to Fred Hubler, founder and president of Phoenixville, Pennsylvania-based Creative Capital Wealth Management Group.

"Many people who budget think of it like a diet. They'll restrict spending like they restrict eating. When you're on a diet, there's a part of your brain that will justify eating the chocolate cake at two in the morning because you've been restricting your calories all day," Hubler says.

Money can work the same way, Hubler asserts. If you cut back on buying the fun stuff, eventually you may splurge and end up overspending and wrecking your budget.

Remember taxes. That is, Hubler says, as you're determining your budgeting percentages, your budget should look at your finances after taxes are removed from your paycheck -- and not before.

[Read: Best Budget Apps.]

Simplify your budget percentages. If splitting up your budget into a lot of little budget percentages seems confusing, you could customize your budget so that it's far simpler. For instance, Ryan Moore, founder and CEO of Kingman Financial Group in Corpus Christi, Texas, likes to go with what he calls his "three-bucket approach: 30% for tomorrow, 30% for taxes and expenses, 30% for today." Do that, he says, and you'll have 10% leftover for rewards.

Moore says that the bucket for tomorrow is the money you save for retirement, your emergency fund, your life insurance and anything that relates to the future.

The bucket for taxes and expenses is, well, taxes, and expenses that are important and you need to pay, even if you could survive without them -- such as your homeowners insurance and car insurance.

"These are the things that will be a constant in life," he says.

"The third bucket I call the today bucket. Thirty percent applied to housing, automobiles, clothing and daily necessities," Moore says.

He adds that you may be thinking that 30% of your budget for today's expenses is too little, and that you'll need to raise it higher, but Moore asserts, "if you set this thought as a guideline, then you are almost guaranteed to achieve the purpose of budgeting, leading you to financial freedom."

Budgeting is all about guidelines, and it's OK to color out of the lines, as long as you're aware you're doing it. The important thing is following a formula that's right for you, whether that's divvying up expenses into budget percentages or buckets or something else. In other words, what your budget looks like often isn't as important as the fact that you are budgeting.