4 Min Read
Financial success involves meticulous and intentional planning or budgeting for the money you earn. Unfortunately, most people don’t enjoy budgeting as they often associate it with restrictions on spending. Rather than viewing it as an expenditure plan, a budget should be considered as a plan for saving and spending your money. Having a budget ensures that:
• All your financial needs are catered to
• You keep your financial goals in check
• You steer clear of debts and manage existing ones
A budget works best when you tie it to a meaningful money goal such as buying a home, a vacation, and so on. However, rather than allocating specific dollar amounts to every item in your budget, you can use more flexible budgeting percentages.
The most common budget percentage is the 50-30-20 rule and can help you calculate how much you should save a month. With this percentage budget, you apportion 50% of your net income towards living expenses and essentials, 30% towards your wants, and 20% towards savings and debt repayment. Other types of budget percentages include Dave Ramsey’s budget percentages and the 80/20 budget, where 80% of your net income caters to your needs and wants while you save 20% or pay off pending debts.
Why Use Budget Percentages?
Budgeting in percentages means that the total expenses for a particular category add up to a predetermined percentage. These percentages offer a holistic view of how you spend your income every month and how to organize your finances. Rather than tracking every dollar, you create spending ‘buckets’ or money jars. Once you earn income, you fill up these buckets or jars, and as you pay bills or spend, you are emptying them.
Percentage-based budgeting ensures that all your needs will be catered to regardless of the changes in your earnings. For instance, rather than using a bonus or a raise at work to pay off a debt, you subdivide the amount amongst all categories.
How to Set Budget Percentages
Just like other forms of budgets, your budget percentage should include:
• Your net or take – Also known as take home pay, this is the income you get after taxes and other benefits have been deducted.
• Monthly expenses – This includes recurring payments such as rent, mortgage, utilities, car payments, and day-to-day living expenses such as clothes, grooming, and groceries.
• Irregular expenses – These are non-recurring but predictable bills such as subscriptions, insurance premiums, and vehicle registrations, among others.
• An emergency fund – This should cover unexpected situations such as medical emergencies, vehicle breakdowns, last-minute travel, job loss, major repairs on appliances, and so on.
• Savings – Building your cash reserves enables you to take calculated risks with little or no worries.
How to Use Budget Percentages to Achieve Money Goals
You probably have innumerable expenses in your daily life and it's possible you may be overspending in some categories. Just having a list might make it hard to know which category each expense falls under. You can easily achieve your money goals by dividing your budget into the following broad categories:
• Housing – Includes rent payments, mortgage, homeowners association fees, home remodeling costs, maintenance fees, and so on.
• Food – This is inclusive of costs related to eating out and any expenses on groceries
• Transportation – This not only includes all the public transport expenses related to how you get from one point to another but also costs associated with owning a car except for insurance.
• Health – Contrary to what most people believe, health expenses should not be inclusive of health insurance. Of course, this cost will fluctuate depending on the circumstances.
• Utilities – Including gas, electricity, water, internet, and trash services, among others.
• Insurance – This includes all the premiums you should pay, including car insurance, homeowner’s insurance, health insurance, and life insurance, among others.
• Savings – This not only covers the savings for your financial goals but also debt repayments and your contribution to retirement funds.
• Entertainment – Entertainment expenses include expenses incurred while traveling for leisure, gym memberships, movie tickets, bars, and so on.
• Miscellaneous expenses and charitable giving
Building Your Budget Percentage Breakdown
Once you have classified your expenses into the above expenses, there is a general rule on how much you should spend on each. Being a percentage, this figure is a range. Therefore, you cannot spend on the upper limit of the scale in all categories, or you will be living beyond your means. You may break down your budget percentage as follows:
• Housing expenses – 25-30%
• Food and groceries – 10-15%
• Transportation – 10%
• Health – 5-10%
• Utilities – 5-10%
• Insurance – 10-20%
• Savings – 10-20%
• Entertainment and recreation – 5-10%
• Miscellaneous expenses and charitable giving – 5-10%
Budget percentages are not set in stone. Although the above budget percentages may work, you may need to adjust the percentages accordingly if you have one or more aggressive savings goals. The same applies if you have a debt that you want to pay off as soon as possible. You can always adjust your budget percentages depending on your spending patterns and financial goals. And to dive deeper, you can look more into how much you should save per paycheck.
In a nutshell, creating a budget helps you gain financial health by ensuring that you control the money you earn and how you spend each dollar. It may seem daunting to make and stick to a budget, and helpful tools such as the Monorail app make it easier. Monorail helps you create savings goals and track your spending by offering real-time information on all your accounts in one place.
Get a head start on your big money goals by seeing if saving with Monorail would work for you.
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