Hate Budgeting? How a Percentage-Based Budget Might Work for You
I've heard just about every excuse in the book for not making a budget. I've even excused my own way out of budgeting more times than I care to admit. What I've learned in the process is that just like diet and exercise plans or productivity goals, budgets aren't one-size-fits-all. In other words, the style of budgeting that helps you get your personal finances on track might be a disaster for someone else. (See also: Build a Better Budget in 5 Minutes Flat)
One very simple and easy-to-follow budgeting style is percentage-based budgeting. Is it a fit for you?
First, What Is a Percentage-Based Budget?
Before we get into who a percentage-based budget is best suited for, let's take a look at how this type of budget works. That'll be easy, because percentage-based budgets are ultra simple. You earn a certain amount of money each month. You set percentage targets for how to divide that money up toward your current expenses, savings, debt repayments, fun, and any other category that's important to you.
So what does that actually look like?
One very common example of percentage-based budgeting is the 60/20/20 budget, in which 60% of your income is devoted to necessary expenses, 20% is devoted to savings and the remaining 20% can be spent on non-essentials (so, the fun things you want but don't really need). That's just one example though; you can break up your income in any way that works for you. The key is to prioritize your expenses (including debt repayment, if that's an issue for you) while still leaving something for yourself.
So is this type of budget right for you? Here are five signs that percentage-based budgeting might just have your number.
1. You Earn a Variable Income
One of the biggest excuses against budgets I've heard is from people who earn a variable income. After all, if you don't know how much money is coming to you each month, how can you decide ahead of time how much to put toward various financial goals and obligations?
The answer might just be a percentage-based budget. If you budget by percentages instead of fixed amounts, you help ensure that money always goes toward some long-term financial goals, rather than disappearing to discretionary purchases. The biggest plus, though, is that if you set aside a percentage for fun purchases, you'll always get to enjoy some of your money. And, the more you earn, the more you'll get to enjoy. How's that for motivation?
2. You're a Bit ... Anal
Do you eat the exact same breakfast or lunch every single day? Do you correct other people's grammar? Do you always follow the exact same routine at the gym? Then a percentage-based budget might be for you. Percentage-based budgets are for people who like rules. You don't have to think about it. You don't have to decide. You just divide your money out the same way, each and every month. For some people, that act, in itself, is very satisfying.
3. You're Into Instant Gratification
Some people are minimalists. They don't really feel the need to spend money on a lot of new things, they don't get much of a kick out of eating at restaurants and, overall, the things they enjoy don't tend to cost money. Saving money tends to come pretty easily to people like this.
On the other side of the coin are the people who are really invested in going out for dinner with their friends, taking vacations, going to concerts, shopping, and doing whatever else makes them feel they are enjoying their money in the right here and now. Unlike the minimalists, they tend to see their money as a way to enjoy life, and for them, saving money can often take a backseat. If this sounds like you, consider a percentage-based budget. It will ensure that you'll get to spend a percentage of your income on whatever makes you happy every single month. Maybe you're already doing that anyway. The only difference is, with a percentage-based budget, you get to do it guilt free. (See also: Lifestyle Inflation: The Ultimate Financial Trap)
4. You Have a Lot of Financial Goals and Obligations
It's easy to just divide your money up and put it toward expenses and savings and then splurge on the rest, but many of us have financial lives that are much more complicated than that. There are credit card debts and student loans and taxes and mortgages and 401(k)s and IRAs and college educations to think about, right? As it turns out, the more complicated your financial life, the better a percentage-based budget might work for you.
So, let's say you have devoted 20% of your income to savings. You can then subdivide this to cover retirement savings and an emergency fund, or saving for your kid's college and saving for a vacation. You can also adjust how much money is going into each account based on your needs. As you approach retirement, for example, you might want to make your retirement account a bigger priority. The great thing about using percentages is that they allow you to be flexible while still holding you accountable.
5. You Want to Live Within Your Means
In the world of personal finance, percentages are important, and percentage-based budgets don't just help to adjust your spending and saving, they also help you analyze it. After all, if you go to setup a percentage-based budget and discover that your expenses are equal to or exceed your income, you'll know that either your income isn't great enough to meet your needs, or that you're living way beyond your means. Either way, setting up a lifestyle that allows you to devote a percentage to savings each and every month is essential to long-term financial stability. Creating a budget based on percentages will help you see whether you need to practice more conscious spending, live on less, or earn more.
Do you use a percentage based budget? How has it worked for you? Please share in comments.