In theory, budgets are a perfect tool for saving money. Just stick to your spending plan and watch the cash pile up. But when you try to find one that fits your unique situation, it’s often more difficult than you’d expect. Templates rarely have all the right budget categories, let alone the perfect budget percentages.
Because frankly, most standard budgets are too rigid or generic. The best strategy is to find one oriented toward your general financial situation, then customize it from there. To help you do that, we’ve put together this guide. Whether you’re a natural spender or natural saver, here are the best frameworks to start with when you’re creating a budget.
The Budget Categories that Matter Most
At the end of the day, the only two budget categories that matter are A) Spending and B) Saving. In fact, budgets are nothing more than an intentional spending plan designed to help you meet your goals for the saving category.
So before you try to figure out the particulars of your budget and where you want to spend your money, first set a goal for what percent of your income you’d like to save.
And once you’ve followed your budget for a few months, use your actual savings rate as the metric for whether you’ve been successful or not. It’s arguably the best gauge of your financial trajectory, and even gives you a solid estimate for how long it will take for you to retire:
We’ll outline budgets at the lower and upper ends of generally achievable savings rates to give you a healthy range of percentages to aim for in each budget category.
Line-itemization is what you probably think of (and maybe shudder at) when you picture a budget. It usually involves a spreadsheet and strict dollar limits for individual expenses on a monthly and annual basis.
These work especially well for detail-oriented people who are particular about their money and enjoy making sure that it goes exactly where they want it to.
To create one, you usually start by tracking your expenses for a few months. Once you have a feel for your spending habits, you can eliminate any categories that you find wasteful and adjust the others up or down as necessary.
Line-item Budget Categories and Percentages
To accommodate for the wide range of circumstances and preferences, we’ll be outlining two line-item budgets, both assuming a roughly average American income:
- 15% Savings Rate: The lowest savings rate you can have and still retire at the typical retirement age.
- 50% Savings Rate: Where frugality usually begins to border on deprivation, unless you have an unusually high income.
15% Savings Rate: The Fundamental Line-item Budget
There are a lot of reasons that you may only be able to afford a 15% savings rate. Maybe your income is limited, you’re supporting someone else, or you’re stuck in a high cost of living (HCOL) area.
Whatever the reason, if you’re just looking to get your budget where it needs to be for long-term retirement purposes, here some benchmarks to strive for:
Housing, food, and transportation are by far the most expensive recurring costs and are usually the biggest obstacle when getting your budget on track. As a general rule, they should never exceed a combined 50% of your income if you want to be able to save anything substantial.
This budget also leaves a healthy 15% for the things that bring you joy. If you’re someone who enjoys traveling or other generally expensive recreation, this should still give you plenty of room for happiness while staying within your financial means.
50% Savings Rate: The Aggressive Line-item Budget
For those who want to push their savings to the limit, the 50% savings rate is a great goal to strive for. The 50% savings rate is a magic number.
It means that for every month you work, you save a full month’s worth of expenses. While that might sound like common sense, let’s take a look at what that math actually means.
For example, here’s what it does for the speed at which you can grow a six-month emergency fund:
- At a 15% savings rate, it would take you three years and four months.
- At a 50% savings rate, it would take you six months.
That means that a 35% increase in your savings rate translates to an 85% decrease in time to build your emergency fund.
Now, a 50% savings rate sounds very difficult for a lot of people, but here’s an achievable plan to do it:
Housing expenses usually have the most fat to trim. If you take home $45,000 after taxes each year, 20% would mean a monthly rent of $750 a month, which is very doable in most of the country and even in some HCOL areas if you have roommates or a significant other.
The other big category to cut back on is recreation. If you want to prioritize saving, it’s entirely possible (and potentially rewarding) to have inexpensive or profitable hobbies. And a 5% recreation budget on the same $45,000 income is still almost $200 a month to play with. That’s plenty for a big trip, holiday gifts for a significant other, and a gym membership.
The last budget category that often has a lot of potential savings is transportation.
The average commute to work is about 30 miles roundtrip. The IRS estimates driving costs (gas and accrued maintenance) to be about $0.575 per mile, which means that the average commute of 30 miles costs roughly $4,150 each year.
If you could find a way to live close to work and eliminate your commute costs by walking or biking to work, you’d free up a ton of space in your budget.
How’s Your Budget Looking?
We hope this article has helped you dial in your budget categories and percentages.
Now we’d like to hear from you. Have you found any great ways to save in one of these categories? Which ones have been problematic for you?
Let us know in the comments below!