Personal budgets are key to keeping track of your money. It is important not only to keep track of what is coming in, but also what is being spent and where it's spent. Knowing the percentages of your income that are allocated to expenses, investments and savings is important to making your budget a planning tool instead of a static report. Ratio guidelines can vary depending on what you want your budget to focus on -- for example, getting out of debt or providing maximum savings -- but the ratios here provide a starting point toward your specific goals.
Determine Your Income
Calculation of income is the starting point, as all of the ratios are driven from this total. Be sure to include all sources of income that are received in the household. These can include salaries, commissions, bonuses, investment income, rental income, consulting income and any other source of income that contributes to your budget. Items that vary monthly, like commissions and bonuses, can be averaged over time; that average should be used in your calculation of total income.
Each expense or savings category will then be divided by your income total to generate your ratios. Ratio guidelines vary slightly depending on your source, but those listed throughout this article have been compiled from sources like CNN Money, Dave Ramsey and Forbes.com, and are meant to be good starting points.
Start With Housing Expenses
Housing expenses include items like your mortgage or rent, home or renter's insurance, property taxes and additional amounts for repairs and smaller home improvements. Utilities in this section include bills for electricity, gas, water, phone and garbage collection. Your rent or mortgage payments should account for no more than 20 to 25 percent of your income. When adding in the other expenses in this category, your ratio for the total should be 30 to 40 percent of your income.
Incorporate Transportation Expenses
Expenses in the transportation category include vehicle payments, gas, insurance, taxes and an additional amount for repairs and maintenance. If you live in a big city and use public transportation, or have to pay for tolls or parking at your place of employment, these expenses should be included as well. This category should be no more than 15 to 25 percent of your income.
Figure General Living Expenses
Living expenses cover many items. It is also one category that can expose problem areas in your budget, while also highlighting areas for improvement where additional savings can be found. An example of the items included in this category are medical and dental expenses (if not already deducted from your paycheck), day care, camps or after-school care for children, groceries, entertainment, dining out, clothing and vacations. Also included are smaller items like dry cleaning, magazine subscriptions and club memberships. This category should account for 20 to 25 percent of your income.
Add Debt Payments
This category includes additional items that require you to make a payment each month. Examples include credit card payments, store credit cards, student loan payments and home equity line payments. Debt payments should be no more than 5 to 10 percent of your income.
Include Savings Goals
Savings is the most neglected part of a personal budget, but it is also one that should not be ignored. Savings begins with building a rainy-day fund of at least six months of income to protect against unexpected events like job loss. The higher your income, the larger this fund should be. This is the first priority of your savings plan. Once your rainy day fund is established, then you can apply your savings money toward special projects or retirement investments. Savings in the 10 to 15 percent of income range should be considered the minimum.
Review Your Budget
Once you are confident that you have accounted for all expenses, review your ratios. The more detail you have entered into the budget, the more accurate your ratios will be, and the more useful this powerful budget tool will become.
Based in Cary, N.C., Greg Hrabec has worked in finance and small-business operations since 1989. He has also written for "Boom" magazine. Hrabec earned his M.B.A. in finance from Strayer University and his Bachelor of Science in finance from Ferris State University.