How to Create a Budget Through Budget PercentagesPublished on February 12, 2021 by Daniel Azzoli
When you think of fun activities to dive into on a Saturday afternoon, working on your budget may not be at the top of your list. If poring over your finances isn’t your idea of a good time, we won’t blame you. But while it may not be the most exciting way to spend your time, that doesn’t make it any less important. Spending your money without a plan can be a dangerous game, and your finances are an area of your life where you’re going to want to stay as organized as possible.
If you have no experience with putting together a budget, you may not have a clear idea of how you’re supposed to go about organizing your finances in the first place. But let’s be clear about one thing: the goal of a budget is more detailed than simply compiling your expenses and subtracting them from your income. By allocating a percentage of your income to different areas of your spending, you’ll gain insights into what you’re spending your money on, but you may also have an easier time saving up for short- and long-term goals, paying off debt, putting money away for your retirement, and more.
For these reasons, we’re going to go over how to break your spending down into budget percentages. We’ll review the benefits of using budget percentages, break down a popular budgeting method, and then show you ways to fit this to your unique financial situation.
How Can Budget Percentages Help You?
While you could just set a specific dollar amount to how much you can spend on certain areas of your life, there are some potential benefits to formatting these areas into percentages instead. By breaking things down through monthly budget percentages, you may get a better idea of the whole puzzle that makes up your finances. When you have better insights into this sort of thing, you may have an easier time amending some of your spending habits in order to hit your financial goals.
When you use (and stick to) this type of budgeting method, you’ll making sure that every dollar you have coming in has an intended purpose. This is a key part of reaching any sort of financial goal, whether it’s short or long term.
If you want to try to visualize what this looks like, picture your budget in the form of a pie. This pie is going to be sliced up into different pieces, some big and some small. Each slice is going to represent a different area of your budget, expressed as a percentage. When things are laid out for you in this way, a few things might become clearer. You’ll likely be able to see what your biggest expenses are, how much of your money is going towards your financial goals, and where to make adjustments if something is off.
Setting Your Budget Percentages
While we’ve established that using budget percentages can be helpful, we haven’t gotten any closer to breaking down how you should actually be organizing your finances. To start, let’s take a look at some of the common things that will likely be in your budget. These can include:
- Housing costs
- Utility bills
- Transportation costs
- Personal expenses
These are just some standard expenses that you’ll likely want to include in your budget, but there are plenty of other items that may fall into your budget and could subsequently change your budget percentages. After all, no two budgets will be exactly the same, and yours should cater to your specific situation. Some of these other expenses could include things like:
- Travel expenses
- Donations to charity
- Pet expenses
- Healthcare expenses that aren’t covered by insurance
Once you include the things that make your budget unique, things can start to get a little muddled if you’re not careful. That’s why you’ll need to stay on top of all the money leaving your bank account and try to make sure you’re organized. You can do this by making a simple Excel spreadsheet and inputting your expenses into different categories. There are also all sorts of budgeting apps out there that can help you to organize your finances.
The 50-30-20 Budget Rule
Like we said, what might look like the ideal budget percentages to you may not look exactly the same as they would for someone else, but if you’re a budgeting novice and need a simple framework to work within, the 50-30-20 rule can be a good place to start.
Within these parameters, 50% of your after-tax income will be allocated to your essential expenses, 30% will go towards your wants, and the remaining 20% will go towards savings and/or debt repayment. Let’s take a look at these categories a little more closely.
50%: Your Needs
The most significant section of your budget is generally going to be the one designated to your essential expenses. This doesn’t include luxuries like your daily trip to your favorite juice bar, but is instead reserved for essentials like:
- Rent or mortgage payments
- Utility bills
- Credit card or personal line of credit payments
- Car maintenance
- Essential clothing
If you follow the 50-30-20 rule, the amount you spend on these types of things shouldn’t exceed 50% of your after-tax income.
30%: Your Wants
Now that we’ve covered the essentials, we can move on to the fun stuff. The next biggest portion of your budget will be the things you may not need, but that you want. Generally speaking, these are things that aren’t essential to your survival, but can play a big role in your overall happiness. They can be things like:
- Movie tickets
- Takeout orders
- Vacation expenses
- Video games
- New electronics
What we’ve listed is only a small sample of things that could go into this category. These will be specific to your tastes and lifestyle, but as a general rule, if something isn’t essential to your survival, there’s a good chance it’ll go into this section.
20%: Your Savings
This may be the smallest category in terms of size, but that definitely isn’t representative of its importance. The things that go into this category can be essential to your short- and long-term financial goals, your ability to support yourself financially in an emergency, and your ability to retire when it suits you. These will be things like:
- Your emergency fund
- Retirement savings
- Real estate investments
- Cash savings
These might be things that you’ve already been diligently contributing towards, but if you haven’t, a good place to start is with your emergency fund. This money is going to be your first line of defense when you run into an emergency expense. This could be anything from an emergency home repair to an unexpected trip to the emergency room. Even if the amount you have in this fund doesn’t cover the entire emergency expense you’re facing, anything extra can be a huge help.
On top of your emergency fund, there are other important things on this list you’re going to want to pay close attention to. One of the most important things to contribute to is going to be your retirement savings. While it’s always best to start early in your life, it’s never too late. Start by seeing if your workplace will match contributions to your 401(k) account. Otherwise, look into Individual Retirement Accounts (IRAs). If you need to learn more about potential retirement options, there are plenty of great resources online to continue your education, or you can speak to a financial advisor to learn more.
Venturing Outside of the 50-30-20 Budget Percentage Breakdown
While the 50-30-20 rule can provide a simple framework for you to work within, you might find that your financial situation isn’t necessarily suited to this particular breakdown of household budgeting percentages. So, if you want to deviate from this, you can!
If you’re comfortable giving up some of your wants in order to boost your savings, you can bump your savings category up to 30% of your income and move your wants down to 20%. If you’re working with a tight budget and your essential needs are going to need to take up more of your income, you can switch to a 70-20-10 format. You can even ditch the three-category format and split your budget up into even more categories if that works best for you.
To help guide you through this process, consider what’s most important to you in life. Do you have your eyes firmly set on an early retirement? Do you prefer to live in the now and spend more on your wants? Do you have a load of debt to pay off? Use the answers to these questions to help determine what your budget percentage breakdown needs to be to accommodate your lifestyle and goals.
Consider Using Budget Percentages
Like we said in the intro, putting together a budget isn’t necessarily a fun activity. If it’s something you’ve never done before, the thought of it might even seem a little daunting. But this doesn’t make it any less important, and it doesn’t need to be this imposing, scary task!
Breaking your spending down into budget percentages is a simple way to keep track of your finances and ensure that every dollar you have coming in goes towards an intended purpose.
While the 50-30-20 rule might be the recommended budget percentages a lot of people use, don’t be afraid to deviate from this format and create a template that works best for you.