Dave Ramsey is a well-known name in the finance sector. Anyone who is struggling with adulting, especially managing their finances, has heard of him and his success stories.
Nevertheless here is a brief intro for those who are new to the name. Dave Ramsey from “The Ramsey Show” is primarily known for his astounding financial solutions. He has used his struggle of getting out of bankruptcy and a huge debt to spread wisdom to the masses.
The best part about taking his advice is that it’s simple, for example, the 7 baby steps. So let’s get into the Dave Ramsey Budget Percentages to see how one can best manage and create a budget.
Dave Ramsey Budget Percentages
The Dave Ramsey Budget Percentages are a guideline toward managing your expenses by the finance guru himself. In these percentages, he has given an appropriate percentage of the amount of money you should be spending in different places.
To answer why Dave Ramsey Budget Percentages work, it’s because of the perfect balance that they have been set on. The second factor is the following of a certain plan. By doing this and setting money aside at the beginning for different things, the chance of overspending in one area is minimum.
These percentages are simple and easy to follow, which is why they are perfect for newbies. One thing that needs to be added here is that the Dave Ramsey Budget Percentages are applied to your earnings after paying taxes.
Although your 401(k) contribution and health insurances can be unpaid before you apply them.
Below are the Dave Ramsey Budget Percentage recommendations that have made managing personal finances so easy:
- Utilities – 5-10%
- Transportation – 10%
- Saving -10%
- Recreation – 5-10%
- Personal Spending – 5-10%
- Misc – 5-10%
- Insurance – 10-25%
- Housing – 25%
- Health – 5-10%
- Giving – 10%
- Food – 10-15%
These are 11 budget categories that we will further look into in this post to help you understand how to start budgeting.
What Budget Categories Does Dave Ramsey Recommend?
Utilities – 5-10%
The utility portion includes all the services you use and pay bills for in your home. The basic utilities that the average person requires in their home include gas, water, electricity.
Some other utilities have become a necessity in our lives over time. These may include your landline, mobile phone bills as well as your internet connection.
The 5-10% range describes how your utilities shouldn’t take over the maximum portion of your budget. These basic requirements often tend to topple over the budget of most households.
Transportation – 10%
When it comes to transport the Dave Ramsey Budget Percentages have dedicated a good 10% to it. The reason behind this is the significance of transport in our daily lives. If you’re not commuting to your job, how will you earn in the first place?
Keep in mind transport includes any the money you spend on getting from one place to another.
In case you use public transport, it will include your bus or train fare. Alternatively, if you use your own vehicle, then any money you spend on it will also be included in the 10% transportation budget.
Additional expenses such as car servicing, oil changes, maintenance, and gas are all part of this budget as well.
When we are young we tend to not be very far-sighted. So, it’s hard to start planning for the next thirty years when we don’t even think farther than a few months. This is where the Dave Ramsey Budget Percentages have your back.
The 10% of your wages you put into savings will help sustain you when you are old and no longer able to work. These savings could also help you through a rough financial patch of your life.
Lets us be far-sighted not forget emergency funds and any other high-end future investments you might want to make. In conclusion, it is better to have saved up a certain amount of money over time to keep you covered in the future.
According to Dave, it is you should first focus on saving up an emergency fund. Once this has been achieved go for paying off debt. When you have gotten your debt out of the way you can go back to saving up 3-6 months of expenses.
Now 10% is good enough, but if you are ambitious we would recommend you to get the 3-6 month expense goal. For this, you might have to save up more than 10% of your income.
Recreation – 5-10%
Recreation can include anything that you spend on to make your life better that is not a basic necessity. This could cover eating out, spending on dates, a night at the club, or going to the movies.
This will also include any vacations you take and Netflix or other subscriptions you get.
Recreation is also a high alert sector when it comes to overspending. Most of us get more than a little carried away when spending on lavish dinners and vacations. The trick here is to maintain the quality of your recreational endeavors but minimize the frequency. Try eating out twice a month at a good place rather than ordering ten times from substandard restaurants.
Personal Spending – 5-10%
Personal spending is like a bonus to the recreation category in the Dave Ramsey Budget Percentages.
It’s almost like Dave realized how hard it must be to spend so little on the fun things. So he made another category for the same purpose with different names to decrease the guilt.
Personal spending can be anything you buy for your own pleasure and happiness. A perfume you liked, some new clothes or maybe a gym membership.
All of these will come under this category.
Misc – 5-10%
As the name suggests this category is for the random, often unexpected expenses or shifts in your budget. We can’t plan and accurately calculate every single part of our lives.
Sometimes certain expenses are highly unexpected but equally necessary. Maybe a friend needs some cash, you have unexpected guests, or an emergency requiring immediate attention. All of these scenarios will put a shift in your budget.
To prevent these imbalances in your finances the Misc category has been created. It helps smooth out your expenditures and gives you a little room to cater to uncontrollable situations with grace.
Insurance – 10-25%
The insurance category is for all types of insurance. These may include life insurance, vehicle insurance, travel insurance, homeowner’s insurance, pet insurance, and renters insurance, etc.
10-25% of your income has been dedicated to paying for your insurance by the Dave Ramsey Budget Percentages.
Housing – 25%
The building or buying of one’s own house in this day and age is a big deal. So big that it might be your most major expenditure overall. This is why Dave has dedicated a hefty 25% of your total budget to this specific category.
The housing includes your rents and mortgages. Furthermore, it also covers any and all PMI, taxes, and HOA fees that you might pay for it.
According to Dave’s recommendation, it is completely reasonable to spend 25% of your income towards keeping a roof over your head.
Health – 5-10%
Healthcare can be expensive at times. Well, if it’s the common cold medication or an aspirin here and there it doesn’t add up to too much.
On the other hand, if you have a chronic illness, or some other major disease could cost you a lot more. Hospital visits, lab tests, operations, etc tend to drain a person’s wealth pretty fast.
But this is a worst-case scenario, and you will have your savings to cover up for a major portion of such expenses. Talking of the average routine healthcare, it will easily be covered in 5-10% of your monthly wages.
In fact, keep a check on this category and you might even be able to save a few extra bucks.
Giving – 10%
The Dave Ramsey ideology highly supports giving a certain part of your income to the people in need. Therefore the Dave Ramsey Budget Percentages include a 10% portion for giving away.
This sum can be spent by tithing, for people with religious beliefs, or you could just give money for any good cause. What’s important here is that you put away a certain sum of money from your wages to help another soul.
This specific criterion can have certain exceptions, for example, a person is under debt. In this case, one would probably want to pay this debt off as soon as possible. Giving might slow down this process.
According to Dave’s recommendation, it is still best to give the 10% as per the budget. In conclusion, it is suggested that this is a personal choice.
Food – 10-15%
10-15% might seem like a very limited amount for food, especially if you are a foodie. With such a limited budget you might have to In fact focus on minimizing or even completely avoiding dine-outs.
It does seem like a daunting task. But, if you plan on paying off debt then squealing your expenditures and stepping up your savings is your best shot.
So get ready to live off coupons, plan your meals in intricate detail and avoid extra snacks till you get back on your feet.
Do Dave Ramsey Budget Percentages Provide Positive Results?
Talking statistically, the Dave Ramsey budget percentages have worked for a lot of people who have followed them religiously. But the thing is, not everyone has similar circumstances.
There are a lot of varying factors that may affect your ability to stay within the budget limits recommended by Dave. For example, you might be living in a more high-end part of the city. Maybe you are living in a more expensive city like Newyork.
In this case, maintaining the housing category of your budget is close to impossible. So you might feel like you are falling behind on the guidelines. But that isn’t true.
You aren’t supposed to follow the guidelines so vigorously, this is why these are only guidelines and not hard and fast rules.
Just try to maintain most of your budget in accordance with the recommendations made by Dave and you will be good to go. What is important is that you stay consistent in your efforts to maintain your budget.
Applying the Dave Ramsey Budget to Realistic Numbers and Evaluating its Efficiency
Now let’s check how efficient this budget plan is when applied to a normal person’s real income. A friend of ours earns $75000.
First of all, let’s cut out the taxes to see how much we are left with to put into our budget. You can use the SmartAsset calculator to check this amount.
This will be cut down to $54,055, which will make a monthly income of around $4,504.
Now let’s check how much we will get to spend in each category of the Dave Ramsey budget percentages.
On Monthly Basis
- Utilities – 5-10%: $225
- Transportation – 10% : $450
- Saving -10%: $450
- Recreation – 5-10%: $225
- Personal Spending – 5-10%: $225
- Misc – 5-10%: $225
- Insurance – 10-25%: $450
- Housing – 25%: $1,126
- Health – 5-10%:$225
- Giving – 10%:$450
- Food – 10-15%:$450
- On Yearly Basis
- Utilities – 5-10%: $2,700
- Transportation – 10%: $5,400
- Saving -10%: $5,400
- Recreation – 5-10%: $2,700
- Personal Spending – 5-10%: $2,700
- Misc – 5-10%: $2,700
- Insurance – 10-25%:$5,400
- Housing – 25%:$13,512
- Health – 5-10%: $2,700
- Giving – 10% : $5,400
- Food – 10-15%: $5,400
Other Budgeting Styles You Could Look Into
Now that you have read this far and haven’t found a satisfactory budgeting solution in Dave’s formula, don’t lose hope. Here are a few other budgeting recommendations to consider.
In a zero-based budgeting system, each dollar you earn is put into a specific category. To put it simply, if you subtract your income from your expenses the result will be nil.
This budget can be modified according to personal priorities.
Cash Envelope Budgeting
The cash envelope Budgeting system is a different approach to managing finances. It is also very straightforward and practical. Let’s look at how it works.
In this budget system, you will use different envelopes.
At the beginning of the month, or when you get your pay you can put money in them. Each envelope has a separate category and a certain defined amount of cash is put in it.
This way you are aware of your financial limits and once your envelope is empty you know it’s time to stop spending in a certain place. This is a very effective way to prevent overspending.
Budget By Paycheck
In this method, the budget is created according to each paycheck a person receives.
How does the 50 30 20 budget rule work?
The 50 30 20 budget is a very simple approach to managing finances. The agenda is to spend 50% of your total income on your needs. These are the absolute necessities of a person.
30% is spent on a person’s wants. These are their desires, the things that bring us happiness.
Lastly, 20% that is left is saved up or invested to provide us with a good amount for future emergencies or growing wealth.
The 70 20 10 rule
The ideology behind the 70 20 10 budgeting rule is similar to the 50 20 10 budget. The variance is observed in the percentage allocated to different categories.
According to this budgeting methodology, you should spend the biggest chunk of your budget on daily living expenditures.
20% of your monthly paycheck should be spent on paying off your debt or saving up for the future.
The last 10% of your income should be invested to grow your wealth and increase the value of your money.
Does The Perfect Household Budget Even Exist?
The perfect household budget can never be a single key to fit all locks. Different people have varying circumstances and priorities. This is why a single formula can never be successful for everyone.
The main point is to select the budgeting technique that best suits your needs and stay consistent with it.
How to Begin With Budgeting
A good approach to initiating your budgeting and financial management is a complete evaluation of your expenses. These will include the different categories mentioned above. You can look into them and check them off on your list of expenditures.
This will make it easy to decipher where all your cash is going and where you can cut the flow from.
To Wrap it Up
In the end, we would conclude that even though budgeting seems like an impossible and daunting task, it is necessary. Try to start as early as possible to avoid hefty amounts of debt and uncontrolled expenditures.
Look into each of the different methods given above and try to work with them consistently to achieve your financial goals.