Rachel Cruze: What Everyone Gets Wrong About Budgeting
When people think about budgeting, they usually think of scrimping or deprivation, denying themselves enjoyment. For some, it’s about marking every expense and accounting for every dollar with a rigid spreadsheet. For others, it’s about sticking to the outlined percentages in their budget.
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Rachel Cruze, bestselling author and personal finance expert, shared on her YouTube channel some things people get wrong about budgeting and how to go about it in a more effective, realistic way. Here’s her advice.
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Major Budget Mistake: Setting Standard Percentages for Your Budget Categories
Budgeting isn’t one-size-fits-all and shouldn’t be seen as such. The general idea many people have is that they’re budgeting wrong if they don’t meet specific percentages for their budget categories. These categories could be saving, food, utilities, housing, transportation, entertainment, debt, child care and more. “Percentage or average shouldn’t set a standard for you as budgeting depends on factors like income, location, family size, lifestyle and personal goals,” Cruze said.
A rigid budget can cause you to set ambitious goals you may not keep — which could lead you to abandon your budget altogether. This defeats the purpose of budgeting which is to align your spending with your priorities. It’s always better to set reasonable budget goals you can achieve.
However, there are categories where specific percentage guidelines can be of great use, or at least help you determine how much you should be allocating. Here are those categories, as outlined by Cruze.
Budget Category 1: Giving
It may not make sense to give your money away if you’re struggling to get by yourself. But, outside of dire times, Cruze recommends giving away 10% regardless of your income level. “Giving is an important part of your overall financial picture because it affects you. And so much of you in real life translates to how you spend money,” she said. As you build wealth over time, she advises to give a little until you can give a lot.
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Budget Category 2: Saving
Saving is an important component of budgeting and it’s important to know your shorter-term savings goals and retirement target before drawing up your budget. “The average American saves around 9% of their income and this is a good example of how average budget guides shouldn’t be a standard as it depends on your goal,” Cruze said.
If you have a fully stocked emergency fund and no debts — which should take precedence — she recommends putting 15% of your income toward retirement. You can do this through vehicles such as a 401(k), 403(b) or IRA.
Budget Category 3: Housing
Despite the rising cost of housing, Cruze recommends budgeting no more than 25% of your income toward this category; which would include your rent/mortgage payment, home insurance and other related items. “This average might be conservative, but it’s best this way so it doesn’t eat up your paycheck so it can go to other things like investing or children’s college funds,” she said. “Spending more than this can make your housing situation become a burden for you. However, some people can argue that 25% of their income may not get them their ideal house, especially in the busier cities.”
The Takeaway
No two persons are the same and this should be remembered when budgeting. Your budget should be tailored to your personal goals and challenges. Take the average budget guidelines as an estimate rather than your standard as nobody knows the state of your financial health like you do. As Cruze says, “the foundation [of budgeting] is to spend less than you’re making.”
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This article originally appeared on GOBankingRates.com: Rachel Cruze: What Everyone Gets Wrong About Budgeting