How To Budget With A Percentage Breakdown - The Full Guide
Everyone should have a budget.
Budgeting is crucial, not only for ensuring financial health, but also for generating financial wealth. That’s why a budget percentage breakdown or plan is something everyone could use.
If you’re poor, a budget can help you manage your debt, and if you’re living comfortably, a budget ensures you don’t overspend, and instead you can save and build your money for future years.
Planning ahead this way ensures that:
You’re prepared for all the expenses you encounter
You can review your spending and progress toward financial goals
You can pay off your debts and avoid needing new ones
In this article, we’re going to cover why you should use a budget percentage breakdown, lay out what it needs to include, provide a good example of a budget percentage breakdown, and discuss choosing an alternative.
And without further ado, let’s get straight to it.
Also read: How To Calculate Net Income
Benefits Of Using A Budget Percentage Breakdown
Everything goes up in cost. There’s inflation, there are fluctuations in the economic markets, and we are, all of us, subjected to it.
Therefore, what good would it be to set your planned expenditure in terms of the number of dollars for each category? It’s just not going to work.
Your income may change (if you get a bonus), your housing costs and utilities may change, and crucially, you are liable to run into expensive unplanned costs. And even your financial goals may change over time.
However, you can easily solve this issue by allocating specific percentages of your total income to all of your expenses, rather than set values.
Percentages are easy to understand, and once you’ve established your total income, a percentage of that income into each of your budget categories is easy to work out as an actual figure when you need to.
It’s also a hugely convenient measure to use when it comes to reviewing both your spending and your progress toward your financial goals.
Also read: What Does Annual Income Mean?
Things You Must Include In Your Budget Breakdown
Here’s what you need to include in your budget breakdown:
Your net income - also known as take home pay (the amount you have left after tax and other deductions). This should also include any benefits you receive.
Rent or mortgage
Car hire-purchase payments
Irregular expenses - predictable but not monthly bills:
Funds for emergencies - as a necessary cushion for when the unexpected happens
Appliance repair or replacement
Savings and investments
Also read: How To Calculate Retained Earnings?
Broad Categories For Your Budget Plan
You must be sure to include everything you need to in your budget plan. If you were to miss just one category, this could throw out the whole thing.
Here follows a quick reference guide to help you avoid such an annoyance:
Homeowners association fees
Food And Beverages
Use of public transport
Costs associated with vehicle usage (e.g. gas, repairs, etc.)
Health expenses (because not everything is covered by health insurance)
Savings and investments
Streaming services (movies, shows, box sets, music, podcasts)
Dining with friends
Socializing in bars
Miscellaneous expenses (everything that doesn’t fit into the other categories)
Also read: What Is Ach Payment And How Does It Work?
Example Budget Percentage Breakdown
In case you’re not too sure about what percentage of your budget should be allocated to different categories, we’ve put together the following example of a budget percentage breakdown, that can serve as a really handy guide.
Housing (including rent or mortgage) = 25 to 30%
Groceries = 10 to 50%
Insurance = 10 to 20%
Savings = 10 to 20%
Utilities = 10 to 20%
Health (including dentist, optician, etc.) = 5 to 10%
Entertainment (including Netflix, takeout, etc.) = 5 to 10%
Charity donations and everything else (miscellaneous) = 5 to 10%
Choosing Your Budget’s Percentages
The example budget percentage breakdown above is just one guideline, but there are other ways you could set up your budget’s percentages if you prefer to.
One of the more popular budget percentage breakdowns is the 50/30/20 rule, whereby 50 percent of your income goes towards housing and essentials, such as utilities and transport etc., while 30 percent goes towards your wants, such as entertainment and dining out, and the remaining 20 percent of your income goes towards building your savings and paying off any debts you may have accumulated.
Another well known budget percentage breakdown comes from Dave Ramsay who suggests that you devote 80 percent of your take home pay on your various wants and needs, while the remaining 20% gets split toward debt repayment, savings, and investments.
There is much support for both of these guidelines, but ultimately choosing what proportion of your income depends on how wealthy you happen to be, how you like to spend money, and whether you’re lucky enough to have found cheap housing and transport.
If you aren’t too sure which of these breakdowns best matches your financial habits, you can use your banking app, or download an app that links to your checking account, that will categorize your various spending and expenses for you and show you how much money you’ve been spending in different categories. This makes for an excellent starting point for determining your preferred budget percentages.
Please don’t see your budget planning as a chore. If you don’t want to see it as a need to restrict your spending, you could view it as a plan for your spending. What would you love to spend more money on?
Whether you follow the example budget percentage breakdown laid out earlier, or follow an alternative, having such a plan in place will stand you in good stead for your whole life.
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