If you’re keen on building a wealth status, or you’re planning to save for the future. Then you might want to consider employing the act of budgeting. If you’re an avid reader of Dave Ramsey’s blog or you listen to his radio shows, you will realize that he lays emphasis on the importance of budgeting, even while you are starting your emergency fund in Baby Steps.
How important is budgeting for Dave Ramsey? Hint, Dave Ramsey puts budgeting as his first item in explanation of gazelle intensity.
He maintains the position that a budget helps you outline your expenses, and can be an effective tool in bringing you out of a myriad of debt. But is there a strategy for budgeting? Yes! In fact, Dave Ramsey suggests using budget percentages to allocate funds to each sector of your expenses. You can use these budget percentages to help show how much to put in your cash envelopes via the envelope system. While cash may be Dave Ramsey’s preferred payment type to stick to a budget, you may also consider a debit card or a credit card for rewards (as long as you pay the balance each month).
What do budget percentages mean?
When it comes to budgeting, it’s best to keep things as simple as you can. And one way that Dave Ramsey recommends is by using budget percentages. Making a budget by percentages means dividing your income into percentages for each category of your budget.
Although most experts consider budget percentage breakdowns as a great rule of thumb, it shouldn’t be more than that. That’s because every household have their unique needs, and funds should be allocated on that basis.
What are Dave Ramsey’s recommended budget percentages?
Dave Ramsey has his own budget percentage, which I believe is one of the most thorough. Dave Ramsey made it easy to follow his recommended budget percentages by clearly stating the category that your budget should fall into and the amount you should allocate into each category in your zero based budget. That said, even Dave Ramsey stated that the percentages aren’t magic. In fact, he has a free budgeting template that’ll make it easy for a first-timer to start-out.
Here are Dave Ramsy’s recommended budget percentages by category:
- Giving: 10%
- Savings: 10%
- Food: 10-15%
- Utilities: 5-10%
- Housing: 25%
- Transportation: 10%
- Health: 5-10%
- Insurance: 10-25%
- Recreation: 5-10%
- Personal Spending: 5-10%
- Miscellaneous: 5-10%
Dave Ramsey suggests you divide your monthly expenses into eleven parts to apply his budget percentages. He then suggests that you allocate your funds based on the percentages below:
Giving 10%
Although Dave did not suggest putting a cap on what you give, he believes that it’s best to plan for it. Dave believes that giving creates some sort of blessing that you wouldn’t have gotten if you had kept the money. Some financial experts believe that this opinion emanates from his religious beliefs. Irrespective of the source of his opinion, we believe that it’s of the greater good of humanity to give to a noteworthy cause.
Saving 10%
After clearing your debt and have funded your emergency fund as Dave Ramsey suggests, it’s best to save 10% of your income for future projects.
Some reasons why you should save is to purchase a car, a home, or embark on other big projects. Dave suggests that at this stage it’s best to put 15% in your retirement savings account.
You may also want to consider how the 10% savings would help with your sinking fund for Christmas gifts or a birthday or new tires.
Food 10-15%
You can’t avoid making a budget for feeding since it’s a necessity. However, try to prevent it from taking a huge chunk of your budget.
Dave believes that the budget percentage should be good enough for everything you want to spend on feeding, including eat-outs and groceries.
Utilities 5-10%
Utilities consist of expenses like gas, water, gas, and electricity costs. It may also include phone, cable, and internet costs.
Housing 25%
Dave believes that what you spend on keeping your home should not exceed 25% of your monthly income. He believes that anything more will put you at risk of not being able to cover other expenses.
The allocated percentage for housing is expected to cover insurance, PMI, and other costs attached to your home.
Transportation 10%
This includes every cost attached to conveying you from one location to another. However, Dave suggests that you should allocate extra if you have automobile loans that you’re paying.
Health 5-10%
You can’t avoid incurring health-related expenses, so you have to allocate some funds for it. Have some funds set aside for emergency health expenses, especially if you have an elderly person living with you.
Insurance 10-25%
Insurance fees like health insurance, auto insurance, and other insurance fees fall under this category.
Recreation 5-10%
A little treat once a while you say, but that seemingly “little treat” can become overblown and get you in debt if not budgeted for. As such, you should create a budget for recreation that shouldn’t be more than 10% of your monthly income.
Personal spending 5-10%
There are situations where you just want to buy something for yourself. It could be clothes, shoes, or other personal items. Whatever personal purchase you want to make should fall under this category.
Miscellaneous 5-10%
It’s possible that you have some expenses you’ve overlooked. Make a room for them.
How Dave Ramsey’s budget percentages may be unrealistic
Dave Ramsey’s budget percentages are somewhat rigid and cannot be applicable to all households due to diverse financial demands.
If you reside in places like Phoenix, Houston, Detroit, and Atlanta—you’d be sitting pretty using Dave’s budget percentages. But this may be a challenge if you reside in Chicago, Dallas, New York, and Washington D.C. This is primarily because of the cost of renting and owning a home in those places.
Plainly, if you earn below the national median, then it’ll be almost impossible to maintain a home with 35% of your take-home income. And if you allocate above the suggested percentage for housing, then the entire Budget Percentage structure crashes.
Another flaw in this budget percentage is the deliberate avoidance of factoring in debt relief tools. It seems foolish to hate debt and refuse to discuss debt payments and other debt-relief expenses that most consumers following his advice are saddled with.