It Pays to Do the Math In the Budget Game

Most people can tell you pretty much to the penny how much their mortgage or rent is every month. They can tell you how much they pay each month for their car loan.

But ask them what percentage of their income should be allocated for housing or transportation and they hesitate.

Many don't know.

"Most consumers we counsel don't know how to create a realistic budget," said Tanisha Warner, spokesperson for Money Management International (MMI), a nonprofit consumer-counseling organization.

Last year, MMI helped create personalized budgets during counseling sessions for more than 180,000 clients. Warner says 39 percent of the clients counseled in 2005 attributed "lack of budgeting skills" as their primary reason for experiencing financial hardships.

"Consumers who are familiar with creating a monthly budget usually allocate amounts subtracting from total income in lieu of percentages," she said.

That's one frustrating way to budget.

Budgeting using percentages as a guideline helps you increase savings, repay and reduce debt, prevent impulse spending, distinguish between a need and a want, and identify expenses that can be reduced, Warner said.

Here's what MMI recommends: Your rent or mortgage (including insurance and taxes) should be about 27 percent of your income, minus taxes. If yours doesn't fall at exactly 27 percent, don't worry. The range typically is 20 to 35 percent.

Mortgage lenders use your gross income to determine how much house you can afford, and you can also do that with budget percentages. But to make this simple, let's deal with your net. So let's say you bring home $60,000 (round numbers are easier). Using the 27 percent figure, your mortgage should be about $16,200 a year, or $1,350 a month.

What about your transportation costs? Do you know how much of your budget should be devoted to those expenses (gas, insurance, maintenance)?

It should be about 8 percent, Money Management tells its clients.