How to create a budget that works for you

Put down 20 percent when buying a home. Don’t spend more than 30 percent of your income on housing costs. Keep childcare costs under 10 percent of your annual household income.

These money rules of thumb can be useful guidelines to help you allocate expenses and determine what is affordable. They can also be incredibly defeating when they feel unattainable.

If money “rules” feel completely detached from your reality, know this: the average person often falls short of meeting many of the popular money rules. And that’s okay.

“If you treat ‘rules of thumb’ as rigid rules, prepare yourself for frustration,” said William O’Donnell, president of Heartland Financial Solutions in Nebraska.

“What people tend to forget is that policies are flexible because everyone’s situation is different.”

The important thing is to get your spending under control and create a spending plan that works for you, not some ideal. Here’s how to view money rules of thumb in the context of your personal financial reality.

The rule: Divide your budget into needs (50 percent), wants (30 percent), and savings (20 percent).

The reality: Housing alone can easily eat up half of your salary.

The 50:30:20 rule is a popular budgeting framework that divides income into three buckets: needs, wants, and savings. But mandatory expenses can blow that budget before you even get started.

For example, in 2020, 23 percent of American renters spent half or more of their income on rent alone, according to the latest available data from the US Census Bureau. Add in other needs — utilities, groceries, transportation, insurance, childcare, and debt payments — and there’s little, if any, left for needs or savings.

Don’t scrap your budget if the buckets don’t work. Instead, embrace the principle and adapt the framework to your current financial situation with a view to where you want to be long-term. Sure, it might be more of an 85:10:5 budget now, but over time you can get closer to your ideal balance.

Simply tracking all of your expenses is a good start. You’ll see where every dollar is going and be able to make more informed decisions about your spending.

The rule: Don’t spend more than 7 percent of your household income on childcare.

The reality: Many families spend 20 percent or more on child care.

The US Department of Health and Human Services considers it prohibitive to spend more than 7 percent of annual household income on childcare.

According to a 2022 Care.com survey of more than 3,000 parents who pay for childcare, a whopping 51 percent of parents spend more than 20 percent.

There are few things you can do to drastically reduce childcare costs, but discounts and grants may be available depending on where you live and what your childcare situation is.

The rule: You need a 20 percent down payment to buy a home.

The reality: According to data from the US National Association of Realtors, first-time home buyers typically shed about 7 percent.

The 20 percent down payment rule is outdated, says Jessica Lautz, vice president of demographics and behavioral analytics at the National Association of Realtors.

However, investing more money up front will lower the monthly and total cost of your mortgage, but giving up your savings to buy a home can leave you financially shaky.

According to a 2020 survey by The Harris Poll for NerdWallet, around 30 percent of homeowners felt financially unsafe after buying their current home.

This feeling was most pronounced among younger homeowners, with 42 percent of Millennials and 54 percent of Gen Z homeowners feeling financially insecure after buying their home, compared to 31 percent of Gen X and 16 percent of Baby Boomer homeowners.

A mortgage broker can work out the numbers to help you figure out the sweet spot for your down payment, but you also need to ask yourself a few questions, Ms. Lautz says.

“Do you need savings for remodeling while you’re in the house, or additional savings for other expenses?” she says.

“Would a lower monthly mortgage payment be easier for other monthly expenses like college debt or childcare?”

Updated September 9, 2022 at 5:00 am