It takes more than adding up your spending and subtracting them from your income to create a budget. Setting budget percentages for how much you'll spend on various expenses is critical, especially if you have significant financial goals like paying off debt, building an emergency fund, or saving for retirement.
You can set budget percentages even if you're not a numbers person. It starts with knowing your income, how much you spend each month, and what steps you need to take to reach your financial objectives.
What are the Benefits of Budget Percentages
When creating a budget, there are several compelling reasons to focus on percentages rather than assigning a fixed dollar number to each cost. When you think about your budget in percentages, you get a better picture of how your money is spent each month. As a result, it may be easier to identify areas of spending that need to be altered to meet your objectives.
Let's imagine you make $5,000 each month in net income. You set aside:
- Rent is $1,000.
- $500 to spend on food
- Utility costs are $300.
- The cost of Internet and cell phone service is $200.
- $300 to spend on entertainment
- Debt repayment: $200
- $500 in the bank
Each month that amounts to
$3,000 in bills and savings combined. That's 60 percent of your take-home pay. The question is, what will you do with the remaining 40%?
You are making a budget based on percentages that guarantee that every dollar of your money is put to good use. That's crucial if you're working toward modest or primary financial goals yet don't feel like you're getting anywhere.
Another method to consider the value of budget percentages is as a pie. Consider a pie with various percentages indicating various expenses. What's consuming the most of the pie? And how big a piece of your objectives are you getting? Suppose you save a tiny portion of your income or pay off your student loans. In that case, it may take significantly longer to attain your goal.
How Do I Calculate Budget Percentages
Regarding budget percentages, there are a few basic guidelines to remember. The first question you could have is: how much should items cost?
Here's a quick summary of how your earnings can be split:
- 25-35 percent of the population lives in housing.
- 10-20% insurance (including health, medical, auto, and life)
- 10-15% of what you eat
- Transportation accounts for 10-15% of the total.
- Utilities: 5% to 10%
- 10% to 15% in savings
- 5-10% fun (entertainment and recreation).
- 5% of the cost of clothing
- Personal: 5% to 10%
These are the most fundamental categories your budget is likely to cover. Still, you may need to account for certain extra items that will affect your budget percentages. For instance, you may need to budget for the following:
- Giving to charity
- Repayment of debt
- Child or spousal support payments
- Out-of-pocket medical expenses
- Animal care
- Daycare
Other costs associated with the child (such as diapers, extracurricular activities, and school supplies)
Work-related travel expenditures for which you will be paid later
Putting money aside for unexpected bills (such as biannual car insurance premiums or annual property taxes)
When these types of expenses are taken into account, your budget percentages can drastically change. That's why keeping meticulous records of your monthly spending is critical. Linking your checking account or credit cards to a budgeting app is a simple method; alternatively, you may keep track of your purchases in a spreadsheet or notepad.
Housing is likely to take up most of your money if you're like most individuals. Ideally, you should limit this to 30% of your total revenue. 2 If you spend more than that, you may be putting a burden on your finances. To accommodate increasing housing expenditures, you may need to reduce your other percentages, improve your income, or hunt for a less expensive home.
To Achieve Financial Goals, Use Budget Percentages
Breaking down your objective into monthly chunks and setting a timeframe for accomplishing them is the simplest method to use budget percentages to reach your financial goals.
Assume you need to save
$20,000 for a down payment on a property and have a two-year time frame to accomplish so. This equates to $833 every month. Using the $5,000 per month income example from earlier, saving that much would be about 16.5 percent of your monthly income. That's not too far from the ideal, based on the sample budget percentages provided earlier.
Of course, if you have many goals in mind, using budget percentages becomes a little more complicated. Assume you also have a personal aim of saving 10% of your monthly salary for emergencies. When you add in your down payment goal, you're looking at devoting 26.5 percent of your budget to savings, which may not be feasible.
Starting with your set spending is a fantastic method to approach budgeting percentages when discovering the ideal combination for your money goals. This covers bills like rent, utilities, and insurance––items that must be paid monthly.
Examine each of those costs to determine what percentage of your overall budget they represent. Then figure out whether you can cut those costs to lower that proportion.
After that, go over your variable expenses. This is the money you spend on clothes, food, dining out, vacation, and entertainment. Add up the total proportion of your budget that these accounts account for, and then see what you can cut or, better yet, remove entirely.
Combine the two new percentages for fixed and variable spending. At this stage, the remaining portion of your budget should be devoted to your financial objectives. For example, if fixed spending accounts for 40% of your budget and variable spending accounts for 30%, you have another 30% of your income to devote to your goals.
Finding the right percentage mix may take some time, and you'll need to examine your monthly budget. However, budget percentages can help you achieve your financial goals over time.
Most Commonly Asked Questions (FAQs)
What proportions should I include in my budget
Check out our budget calculator to see what percentages your spending habits are based on your income and expenses. If you discover that something is still missing, add it as a new percentage to your budget.
What do I do now that I have my budget
It's time to put your budget to good use now that you've created one. Check to see if any percentages need to be adjusted, stick to the spending limitations you set, and keep track of your spending throughout the next few months.
What happens if I don't stick to my budget
It's normal to go over budget, but there's no need to be concerned. Reduce your day-to-day expenditure if you have an unexpected bill. If you notice that you are constantly overspending, make adjustments to your budget to prevent future overspending.
