When it comes to something as seemingly straightforward as a budget, there’s a lot of room for error.
You can forget it exists and spend mindlessly until you can’t pay your bills.
You can choose a strict spending plan that makes it impossible to succeed, making you feel like a failure when you don’t.
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| Everything You Need to Know about the Percentage Budget: eAskme |
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Or you can start off on the wrong foot by lying about how much you earn or spend, which makes it difficult to balance the books no matter how hard you try.
All these problems arise when you start with a broken budget.
So let’s take a look at a budgeting method that works right out the gates: the percentage budget.
What is the Percentage Budget?
The percentage budget breaks down your finances into major spending categories, then assigns a percentage of your income to these categories.
You know you’re on track when all your categories add up to 100% of what you earn after taxes.
The most common form of the percentage budget uses three main categories:
- Needs: 50% of your income.
- Wants: 30% of your income.
- Savings: 20% of your income.
However, some variations fudge these percentages according to your cost of living.
If your needs take up more than 50 percent of your income, look to a 70-20-10 breakdown. There’s also the 80-20 Rule, which saves 20 percent so that 80 percent of your income covers your needs and wants combined.
What Are Your Needs?
Fifty percent of your income goes toward the essential bills and purchases you must make to lead a safe and healthy life.
For most people, these end up being housing costs, utilities, insurances, medical bills, and groceries, although you may have more or less depending on your lifestyle.
If you have outstanding installment loans or online line of credit balances, add them to this list of needs. Some installment loans direct lenders recommend this plan of action because it helps you avoid paying late fines on your installment loan or line of credit.
What Are Your Wants?
Your wants are the non-essential purchases that enrich your life. They make things more fun, comfortable, or exciting; their sole purpose is to bring happiness into your life, one way or another.
You should strive to use 30 percent of your income on these wants, as they help keep you sane while being responsible.
What Are Savings?
The remaining 20 percent of your income goes into savings. This chunk of change has many uses in your finances.
Cushioning:
Socking away some money into an emergency fund will help you handle unexpected emergency expenses without taking on another installment loan.
Debt Repayment:
This includes additional payments that go above and beyond your scheduled installment loan or line of credit bills
Remember, scheduled payments are a part of your “needs,” so they should always be a part of your budget.
Goals:
Strong finances have the foresight to prepare for big life events, such as going to school, buying a home, starting a family, and retiring.
Why Use a Percentage Budget?
Structure is the lifeblood of finances. Improvisation, meanwhile, is the bane of your budget.
Making spending decisions on the fly makes it harder to use your money wisely.
But by keeping to a structured plan measured out by no-nonsense percentages, you may find it easier to rein in your spending and save more.
If you still have any question, feel free to ask me.
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