It’s almost everybody’s dream be able to spend as much money as they’d like and still have their bills paid. But the reality we’ve come to know is a different beast!
Sooner or later, you’ll need some sort of budgeting strategy in order to keep from going broke. Without a budget, you’d be hard-pressed to juggle paying your rent, bills, groceries, and debt while keeping the quality of your life intact.
That’s why it’s important to abide by a budget that works for you. Although we all have different financial situations, going by a percentage-based budget might just be the solution you’re looking for!
What is percentage-based budget all about?
Percentage-based budget is a spending and saving strategy that splits your monthly income into fixed percentages. Each percentage division can be allotted to a specific category of living expenses as well as savings. The good thing about it is that it takes into account your present earnings. You can then base off of that to help determine how to allocate your money so you don’t just get to pay your bills—you can also save money in the process.
It differs from your traditional budget since you don’t manage your money depending on what you previously spent on. You don’t have to wing your budget allotment as you go along since you’ve already pre-determined how much to spend on each category.
With that said, a common percentage-based allocation is the 50/30/20 rule where you divide up your income into at least three categories!
1st Rule: Allot as much as 50% towards necessities
For most of us, our needs and expenses take much of our monthly income. Hence, providing as much as half of your earnings only makes sense.
So what kind of expenses classify as necessities? These are your food, mortgage or rent, utility bills, car loan or maintenance, and debt, just to name a few. The list of expenses varies for each person so you can or eliminate as you see fit. But for the most part, about half of your take-home pay should suffice to cover your required bills and living expenses.
For instance, if you’re getting a salary of $5,000 a month and you follow the 50/30/20 rule, $2,500 would go towards your bills.
Allot 30% towards your non-essential spending
Using the 50/30/20 rule, 30% of your income goes toward personal expenses and other wants. This means you can allocate $1,500 toward your wants such as shopping or recreation, and other expenditures that aren’t considered as necessities.
Non-essential spending includes expenses for dining out, shopping, travel or hobby expenses, as well as your gym membership. Although these are classified as wants or non-essentials, it’s still important to apportion a part of your income for such kind of spending especially if it’s integral for your well-being.
However, they’re entirely optional costs so you can adjust it as you deem necessary for your own lifestyle.
Allot 20% towards your savings
The remaining 20% of the 50/30/20 budget plan is allocated towards your savings. For many, this part is often overlooked. Everything either goes to necessary expenses or wants. But saving is an integral part of being at a healthy financial place.
The amount you’re dispensing towards your savings could either go to your bank account or an emergency fund. Another option is to contribute the amount to a retirement plan or an investment account such as a 401(k) or IRA.
Using the previous example of a monthly income of $5,000, 20% of which is $1,000, will go towards the savings option of your choosing.
How do you know if a percentage-based budget is right for you?
A percentage-based budget is right for you as long as you have extra money after covering all your needs.
Although it can easily work for a lot of people, it doesn’t mean that it will work for everyone. For example, it’s not recommended for individuals who can’t make ends meet such as those who are in-between jobs.
It might not also be applicable for people who are in a tight financial spot. This is especially the case for those every cent and penny goes toward their living expenses as well as debt. In such situations, it’s highly recommended to increase your monthly earnings first and to prioritize covering all your needs. Once that’s taken care of, the wants and savings stuff can then come later.
Benefits of Using a Percentage-Based Budget
There are a lot of advantages to using a percentage-based budget. It not only offers you the flexibility to allocate your income based on what would fit your lifestyle, but it also helps you practice discipline.
- Flexibility. In terms of flexibility, you can adjust your percentage allocation depending on your income. This is both suitable for those with fluctuating and fixed income since this kind of budget works for each.
You can change and modify as your expenses and earnings vary with each month. This allows you to take into account whatever your financial situation is at any given time so you don’t have to worry about meeting your budget plan every time.
- Discipline. If you haven’t used any kind of budget plan before, you’ve probably found yourself overspending more than a few times. This makes it harder to balance your budget and to live within your means. The good thing about this budget plan is that it’s structured fairly in the sense that it enables you to meet both your wants and needs without making too much of a compromise.
Of course, the 50/30/20 plan isn’t the only existing percentage-based budget out there. But no matter how you divide your total monthly earnings, a percentage-based budget can be easily personalized according to your need.
Other options include a 60/20/20 plan or 40/20/40 division. It really depends on what you really think would work best given your lifestyle and current situation.
You can also further break down your budget into more specific divisions. For instance, you can choose to allocate 25% to your rent or mortgage, 15% to car payments or transportation, 20% for food, 5% to your insurance premiums, 10% toward health expenses, 10% for savings, and 15% for your personal expenses. The possibilities are endless.
Making the most out of your 50/30/20 budget plan
A budget can only do you good if you follow it. That’s why it’s important to follow the tips below to ensure your success using a percentage-based budget:
- Prioritize your percentages accordingly. You should set your percentage-based budget in the order of the most to least necessary. This means allocate for your needs first and then the wants and the savings. After that, ensure that your necessary expenses and bills are being paid while the leftover money is put aside as you’ve specified it.
If you’ve allotted 20% for debt, make sure that gets paid first before allocating the said percentage for other things.
- Adjust as you need. The thing about a percentage-based budget plan is that it allows enough breathing room for trial and error so make sure to adjust as you see fit. Try it out first in the first few months of your budget and check if your apportioning too much or too little in any given area.
Modify the numbers based on your current situation as well as lifestyle. For example, you received a bonus so you thought of increasing your percentage allocated to pay your debt. Or if your transportation costs have increased, you might want to cut back a little bit on your personal expenses.
The key here is to look at your present financial situation so you can plan for the long term. Don’t make the mistake of deciding your percentages randomly—compute them depending on your current state of finances.
- Lower your costs. Sometimes, it’s not just about budgeting what you have well, it’s also about reducing your monthly expenses so you have more financial room to spare. When you cut down your expenses, you can distribute it to other areas where it counts the most.
A good example is if you want to allocate a maximum of 15% toward your car upkeep and insurance costs but you’re dishing out 20% for it. If that’s the case then it’s time to switch your insurance to a much lower premium or swap your car to something that’s easier to maintain.
There are a host of other creative ways to increase your funds by lowering your costs such as shopping clothes only when there’s a sale or finding a house with a much lower rent.
Your effort to save counts because it can make a difference in the long run. Finding ways to save can be as simple as choosing not to go out for a few weekends or hold off on spending on that new iPhone until you’ve met a saving goal. Whatever you’ve put aside can be allocated towards your budget plan’s save percentage. This way, you’re not just able to save money but you’ll also be able to meet all your financial goals.