If you’re totally new to budgeting, you may have looked up beginner’s budgeting guides online and noticed something called “budget percentages.” Using budget percentages involves assigning a percentage out of one hundred to each category in your budget. Housing gets 30%, savings gets 15%, entertainment 5%, and so on.

Budget percentages are popular because they give you an idea of what your budget should look like, based on the average person’s finances. But the budget percentages system isn’t perfect. In fact, there are better ways you could be thinking about your money.

Pro: A good starting point for your budget

One of the most common questions Hannah gets from her financial planning clients is, “am I normal?” 

Sounds a little weird, but it makes sense! Many people who are unsure of their finances want to make sure that they’re on track or that they’re doing what they’re supposed to be doing. Spending, saving, or budgeting like the average person.

That’s one reason budget percentages are such a popular tool. They give you a sense of what other people are doing with their money and some reassurance that you’re not doing things completely wrong. Think of them as financial benchmarks. As a financial planner, they can also help me spot any major red flags in my clients’ numbers that are way out of the norm.

However, when you take a closer look at some of these benchmarks and how they’re suggesting you allocate your money, it can become problematic.

Con: Not a great source of motivation

How much should you be spending each month on insurance? What about groceries and personal items? Utilities and transportation? Budget percentages act as a rule of thumb and help you figure that out. 

But…these rules are meant to apply to a wide range of people. That doesn’t mean they’ll work for everyone! What if you work from home and don’t commute? What if you’re living with your parents and don’t currently pay for housing? That’s where the problem with budget percentages begin.

Using budget percentages can lead to unhealthy attitudes toward money, too. Say that your budget percentages guide suggests you spend 35% of your expenses in housing. If you’re already doing that, then you feel awesome! You feel validated! Good job.

If you’re not doing that, you may immediately react with shame and a sense of failure. But why? Just because your finances don’t fall under this general rule of thumb doesn’t mean you’re doing a bad job. It just means your situation is different.

One of the lessons I’ve learned over and over again as a financial planner is that our “personal finances” are more personal than they are finances. It’s more important to figure out what works best for you than to figure out what is supposed to work for other people. Especially when it comes to your budget. 

That’s one of my biggest gripes with budget percentages: they focus more on what you should be doing rather than what you personally want or need to be doing. We think that basing your goals on what you want, rather than what you think you should want, is a far healthier and better motivator.

Con: It’s pass or fail only

These budget benchmarks also perpetuate the idea of “pass” or “fail.” Hannah sees this so often in client meetings. Clients who don’t have enough saved or haven’t reached their financial goals? They immediately assign themselves a “pass” or “fail” grade. But with your finances, there is no pass or fail. That’s not the method we should be using to analyze our finances.

A better way of judging your finances is to ask yourself, how do you balance your money with your life? Instead of focusing on making X amount of money at Y age, consider how money can help you live your fullest, most satisfying life. That’s harder to measure.

Rather than say “I want to have X amount in retirement savings by 65 so I can assign myself a passing grade,” you might reframe your goal to, “I want to be able to support my family, pursue my hobbies, and travel the world in my retirement.” Financial success may be harder to figure out with this method, but it’s more personal and more telling than just “pass” or “fail.”

Forget the “shoulds”

Budget percentages give you an easy answer. They tell you what you should be spending, should be saving, should be analyzing in your finances. We want you to flip the narrative and instead think about what you want and what you need. Don’t compare yourself to anyone else. What’s best for you?

Get personal and be honest with yourself. Personal finances are, as Hannah always says, personal. Structuring your budget based on your wants and needs will make you much more motivated and excited to follow your plan than a bunch of arbitrary numbers you found online.

Moving away from the “shoulds” is tough, but it’ll help you form a healthier relationship with money going forward.If you’re looking for more financial tips like these, check out the other tips we share over on our blog!