Are Dave Ramsey’s Budget Percentages Wrong?

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This is a consolidation of three widely used recommended percentage budgets from Dave Ramsey, Credit Counseling Advice, and Consumer Credit Counseling Association:

Charitable Giving             0-15%

Housing and Utilities     20-45%

Food                                    5-20%

Transportation                  6-20%

Medical                                2-10%

Clothing                               2-7%

Invest/Savings                   5-13%

Debt Payments                  5-20%

Personal/Recreation        5-10%

When the three are combined for range, the range becomes too wide.  Let’s see if I can justify narrowing it a bit.

Charitable Giving            0-10%

The national average is around 4%.  That is good target.  If your religion or conscience insists, you might try to do the traditional tithe of 10%.  If you are deeply in debt, your creditors may be wondering how you have enough money to give away, but can’t make your debt payments.

What people give is largely a function of age.  According to the BLS Consumer Expenditure Survey, which was recently released, this is how cash contributions, which includes charitable contributions, alimony, and child support, varies by age:

Age Cash Contributions
under 25 1.0%
25-34 2.2%
35-44 2.5%
45-54 3.2%
55-64 3.4%
65-74 4.4%
75+ 8.1%

Housing/Utilities           30-42%

This should also include home repairs, if you’re a home owner.  These were the approximate high and low groups which I talked about in my last post.  This could be significantly lower if you own your home.  Housing costs vary widely with income and city size.

This is how housing spending varied by income in 2014:

Income Housing (includes utilities)
<11,165 41.3%
11,165- 18,361 40.1%
18,362-26,873 38.4%
26,874-35,681 36.3%
35,862-46,614 34.4%
46,615-59,548 33.7%
59,549-75,976 32.8%
75,977- 99,622 32.1%
99,623-140,195 30.7%
140,196+ 30.4%

This is how housing costs vary by city size:

City Size Housing (includes utilities)
<2,500 30.2%
2,500-100K 31.0%
100K-250K 33.0%
250K -1M 32.0%
1M-2.5M 33.2%
2.5M-5M 34.8%
5M+ 38.4%

Food                                11-16%

This is again the high and low of the groups I examined.  A more useful tool might be using the USDA food plans.  They give recommended spending for a thrifty, low cost, moderate cost, and liberal food plan based on age and gender of your household members.

Food spending percentages are largely a function of income.  This is how food spending varies by income:

Income Food
<11,165 15.7%
11,165-18,361 15.3%
18,632-26,873 14.0%
26,874-35,681 14.3%
35,682-46,614 13.5%
46,615-59,548 12.9%
59,549-75,976 13.1%
75,977-99,622 12.7%
99,623-140,195 12.1%
140,196+ 10.5%

Transportation     10-15%

The range of the groups I looked at spent 14-21% on transportation.  Americans are really just spending too much on automobiles.  I adjusted the range by about 5%.

Transportation spending varies by city size and occupation.  This is how it varies by city size:

City Size Transportation
<2,500 18.6%
2,500-100K 17.9%
100K-250K 19.3%
250K -1M 16.9%
1M-2.5M 17.2%
2.5M-5M 16.5%
5M+ 13.6%

This is how transportation spending varies by occupation:

Employment Transportation
Self-Employment 14.8%
Managers and professionals 16.5%
Technical, sales, & clerical 18.0%
Services 19.4%
Construction and mechanics 19.8%
Operators, fabricators, & laborers 20.6%
Retired 15.9%
All Others 15.6%

Medical 4-16%

This varies widely with age.  Young people could be on their parent’s health insurance policy until age 25.

This is how medical spending varies with age:

Age Medical
under 25 3.4%
25-34 5.4%
35-44 6.5%
45-54 6.9%
55-64 8.8%
65-74 12.2%
75+ 15.6%

Clothing 2-5%

This was the high and low for the groups I examined.  I was surprised Dave Ramsey went up to 7% for this.

Clothing spending varies by age and household composition.  This is how it varied by age:

Age Clothing
under 25 4.0%
25-34 3.9%
35-44 3.6%
45-54 3.4%
55-64 3.2%
65-74 2.9%
75+ 1.9%

This is how clothing spending varied by family composition:

Household Composition Clothing
Married Couple Only 3.0%
Married Couple Oldest Child <6 3.9%
Married Couple Oldest Child 6-17 4.0%
Married Couple Oldest Child 18+ 3.1%
Other Married Couple Consumer Units 4.0%
One Parent with Child <18 4.4%
Single and Other Consumer Units 3.0%

Investment/Savings  0-15%

You may need to go to 0 here if you have a lot of high interest debt. However, you should not pass up an employer match on retirement savings, if you can possibly avoid it.  If you are done paying off debt, you will have the ability to save and invest.  You need to target how much you’ll need for a college fund (check what your expected parent contribution is) and how much you need in retirement.  One rule of thumb is that you will need 70-80% of your pre-retirement income to retire on.  Another rule of thumb is that you can take a 4% rate of return from your retirement accounts.  To figure what you need, take the amount you will need per year at retirement and subtract your estimated Social Security payments (Social Security can’t go broke because there will always be people paying into the system.  Under current law, benefits will drop by about one-third when the trust fund runs out).  Divide this amount by .04 and that is how much you need in your retirement account.  There are a number of retirement calculators online.  This is a link to Bankrate.com.

Debt Payments  10-15%

I think Dave Ramsey’s bottom of the range at 5% is too low and the Consumer Credit Counseling Association’s top of the range of 20% is too high.

Personal/Recreation 5-10%

I agree with the general consensus of the experts on this.

Entertainment costs vary by age and city size.  This is how they vary by age:

Age Entertainment
under 25 4.1%
25-34 4.9%
35-44 5.4%
45-54 4.9%
55-64 5.1%
65-74 6.1%
75+ 4.4%

This is how entertainment costs vary by city size:

City Size Entertainment
<2,500 6.2%
2,500-100K 5.3%
100K-250K 4.7%
250K -1M 5.2%
1M-2.5M 5.2%
2.5M-5M 4.6%
5M+ 4.4%

Putting it all together:

Charitable giving 0-10%

Housing/Utilities 30-42% (consider your income and city size)

Food 11-17%  (consider your income) Look at the USDA food plans.

Transportation 10-15% (consider your city size and occupation)

Medical 3-16% (consider your age)

Clothing 2-5%

Debt payments 10-15%

Investment/Saving 0-15%

Personal/Recreation 5-10% (consider your age and city size)

Coming Up

Tomorrow I plan to blog about how behavioral finance applies to budgeting.

 

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