We’ve seen countless different household budgeting strategies over the decades we’ve spent educating consumers about managing their personal finances and conquering their debt.

Here are our best recommendations for managing your household budget.

How many categories should you have in your budget?

With the economy in turmoil, more experts are proposing different ideas about how to set up a budget. The trend seems to be toward simple advice.

We’ve seen it suggested that you should adopt a simple 20/80 budget: save and invest 20% of your income and live on the other 80%. On a basic level, this is sound advice, but it’s easier said than done in a lot of cases. We prefer to give more comprehensive advice.

Another suggestion is to divide your income into a 20/30/50 budget: set aside 20% of your income to savings, 50% towards necessary living expenses, and 30% towards discretionary spending. We strongly urge people to avoid this system, which for most people will be unrealistic.

But there’s a better way to categorize your budget.

1. Housing 35%
2. Debt 15%
3. Transportation 15%
4. Expenses 25%
5. Savings 10%

The “Expenses” category that makes up 25% of one's budget includes groceries, cell phone bills, entertainment, charitable donations, and other things that don’t fit into the other categories.

This means that one’s discretionary spending or “wants” are only one part of the 25% of one’s budget set aside for expenses.

These guidelines are more realistic and appropriate than the 20/30/50 budget plans, and they are useful for quick budgeting seminars, because the percentages add up to an even 100%, avoiding potential confusion.

We also offer a set of more comprehensive, flexible guidelines as part of our free Power of Paycheck Planning educational seminars. For people who cannot attend in person, the seminar materials are available to download for free on our website.

Want even more control over your budget? Here’s a detailed breakdown:

1. Housing – 35-45%
2. Utilities – 8-15%
3. Food – 10-20%
4. Auto & Transportation – 15-25%
5. Medical – 8-15%
6. Clothing – 3-5%
7. Personal & Miscellaneous – 5-10%
8. Savings & Investment – 5-10%
9. Monthly Installments – 10-20%

You’ll notice the percentages are presented as ranges, not fixed amounts. Each person needs to work with their own finances to create a budget that adds up to 100%.

That means if you spend the full 10% on personal & miscellaneous spending, you’ll need to make cuts somewhere else. You get full medical coverage through your employer, and your medical expenses are below the 8-15% guideline; that means you will have more money to divvy up among the remaining categories. That doesn’t mean you should exceed any of them!

We think it would be irresponsible to put 30% of one’s income toward personal and miscellaneous spending like the 50/30/10 budget mentioned above.

We feel these guidelines help each consumer craft a budget that matches their personal situation and doesn’t try to force them into a simplistic one-size-fits-all budget that only offers 3 categories.

At the same time, it demands discipline from the consumer; it’s difficult for most people to get discretionary spending under 10%. We know that’s a big reason we’ve been necessary for the past 35 years; too many people have accepted the message that they should spend as much as 30% of their income on wants, and when the numbers didn’t add up, they turned to credit cards to keep up with all of their spending.

Budgeting when you have debt

Speaking of credit cards, #9 is a category that’s designed to help the people who seek us out; people with credit card debt and other debts they are struggling to repay.

Say you put 10% aside for savings, as we suggest, and another 10% goes toward credit card bills. Once the credit cards are paid off, the smart thing to do is significantly reduce your credit card use, and put that 10% of your income that was going toward debts into savings.

Then you’ll be consistent with the 20/80 budget; save 20%, live on the other 80%.

Don’t forget savings – plan for your future

As for savings, you’ll want to set 10% of your income aside for retirement. If you’re saving 20%, that means half will go toward retirement savings (like a 401[k]) and the other half will go toward other savings goals.

Your first goal should be to save 3 to 4 months’ income or more in an emergency savings fund. Once you have that savings fund in place, you can use this part of your budget to save for specific goals like college, a down payment on a home, etc.

If you’re really doing a good job saving this portion of your income every month, you may even want to use some of that money to pay down your home’s mortgage faster; owning your home by the time you retire is an important goal, and not having a house payment will go a long way toward helping you afford a comfortable retirement. For more detailed information on tracking your expenses and creating a budget, visit our web site and download our free Power of Paycheck Planning materials.

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If you want to learn more about budgeting or how to reach your financial goals, get started with our free, confidential counseling and education right here at Credit.org.