There is more to creating a budget than just totaling up your spending and deducting them from your income. It’s crucial to establish budget percentages for how much you’ll spend on certain items, especially if you have significant financial objectives like debt repayment, emergency fund development, or retirement savings.
Even if you struggle with math, you can set budget percentages. Understanding your income, your monthly expenses, and the activities you must take to reach your financial objectives are the first stages.
The purpose of budget percentages
When creating your budget, there are many advantages to using percentages rather than just giving a fixed dollar amount to each expense. You acquire a comprehensive understanding of how your income is spent each month when you think in terms of budget percentages. And it can make it simpler to spot areas of spending that might need to be changed in order to accomplish your objectives.
Consider the scenario when your monthly net income is $5,000. You give out:
- Rent will be $1,000.
- For groceries, $500
- For utilities, $300
- $200 will be spent on phone and Internet service.
- A $300 entertainment budget
- $200 to pay off debt
- A $500 savings goal
That amounts to $3,000 each month that is allocated to savings and bill payments combined. That is 60 percent of your salary. What are you doing with the other 40%, I wonder?
By creating a budget based on percentages, you can be sure that every dollar of your revenue is being used wisely. That’s crucial if you’re working toward financial goals of any size and feel as though you’re not making any headway.
The usefulness of budget percentages can also be visualized as a pie. Imagine a pie where different percentages reflect various expenses. What is consuming the biggest portion of the pie? And to what extent are your objectives being met? If you simply put a modest amount of money toward saving or paying off your student loans, it can take you considerably longer to get where you want to go.
Budget Percentage Setting
When calculating budget percentages, there are a few fundamental guidelines to bear in mind. The first query you might have is: how much should items cost?
Here is a quick breakdown of possible revenue distributions:
- Housing: 25%–35%
- Insurance (including life, car, health, and medical): 10% to 20%
- Food: 10-15%
- Transportation: 10% to 15%
- Services: 5–10%
- Saves: 10% to 15%
- Fun (recreation and entertainment): 5–10%
- Apparel: 5%
- Individual: 5–10%
These are the most fundamental areas that your budget is likely to cover, but there may be other costs that you need to consider that will change the percentages that each of you allocate to each category. You might need to set aside money for items like:
- Charity donations
- Settling debt
- Payments for child or spousal support
- Uncovered medical expenses
- Pet care
- Other costs connected to children (such as diapers, extracurricular activities, school supplies)
- Travel costs associated with your job that you will later be paid for
- Ssave for unforeseen costs (such as biannual car insurance premiums or annual property taxes)
Your budget percentages may drastically change if you take these types of costs into account. Because of this, it’s crucial to carefully track every dollar you spend each month. Connecting your checking account or credit cards to a budgeting app is a pretty simple method to do this; alternatively, you may keep track of your purchases in a spreadsheet or notepad.
If you’re like most individuals, housing is probably the biggest portion of your budget. Your goal should be to maintain this under 30% of your revenue. 2 Your budget may be strained if you are spending more than that amount. In that case, you could need to reduce your other percentages to account for greater housing expenditures, boost your income, or hunt for more affordable home.
Utilizing Budget Percentages To Reach Financial Objectives
The simplest method to use budget percentages to achieve your financial objectives is to divide them into monthly components and establish a schedule for completion.
Assume, for instance, that you have two years to put up $20,000 for a down payment on a house. That amounts to $833 a month. Now, based on the $5,000 monthly income estimate from previously, saving that much would account for about 16.5% of your earnings. According to the prior sample budget percentages, that isn’t too far from the optimum.
Of course, if you have many goals in mind, using budget percentages becomes a little more challenging. Say you also want to save 10% of your salary each month for unplanned expenses. Combining that with your down payment target results in a savings commitment of 26.5% of your budget, which might not be attainable.
Starting with your fixed expenses first is a solid method to approach budgeting percentages when you’re attempting to discover the appropriate combination for your financial objectives. This covers monthly bills for things like housing, utilities, and insurance.
Examine each of those costs to see what share of your overall budget they represent. Then, see if there are any expenses you can cut to lower that proportion.
Continue with your variable expenses next. Spending on things like clothes, food, dining out, travel, entertainment, etc. is included in this. Once more, sum up the percentage of your budget that each of these costs, then consider what you can cut back on or, better yet, do away with entirely.
Add the two updated percentages for spending that is both fixed and variable. Your ability to dedicate funds to your financial objectives should now make up the remaining portion of your budget. You can commit an additional 30% of your income to those goals, for instance, if your budget’s fixed expenses account for 40% of it and your variable expenses for 30%.
Finding the ideal proportion blend may take some time, and you’ll need to reassess your budget each month. But employing budget percentages over time can result in reaching financial objectives.
Questions and Answers (FAQs)
What proportions should I include in my budget?
Check out our budget calculator to discover what the percentages are for your spending habits after adding your actual income and expenses. If you discover that something is still missing, add it as a new percentage to your budget.
I’ve got a budget; what do I do now?
It’s time to put your budget to use now that you have one. Check your percentages over the coming months to determine if you need to make any adjustments, and make sure you stick to your spending restrictions.
What should I do if I blow my budget?
Budget overruns do occur, but there is no need for concern. Reduce your regular expenditure if there was an unforeseen expense. If you discover that overspending occurs frequently, change your budget to assist stop it from happening in the future.