Percentage Budgeting

We often find ourselves questioning if we are being sensible with our spending habits. Should we have gone out for dinner that night, was it a good idea to splurge on that watch, or was that really a good choice for a car loan, and how much should we really be saving anyways? In life balance is key, and thats what percentage budgeting is all about. A percentage budget divides our yearly income into a percent of spending towards three important areas in our life:
  1. Our required expenses (needs)
  2. Our enjoyment (wants)
  3. Our debt and savings (future)
Traditionally a percentage budget divides into 50/30/20, however that leaves a lot of room for imagination. Here, we have revised the list and percentages in detail.
  1. Needs – 60%
    1. Housing 25-35%
    2. Food (including dining out) 12-15%
    3. Health care (including insurance) 7-10%
    4. Utilities 5-8%
    5. Transport (including car payments) 5-15%
  1. Wants – 20%
    1. Personal care (including clothing) 5-15%
    2. Entertainment 1-5%
  1. Debt and Savings – 20%
    1. Credit Card/ Loan repayment (not including car payments) 10-15%
    2. Savings and Investments 5-10%
Using a Percentage Calculator can help you establish the dollar amount equivalent of these percentages, based on your income after tax.
A percentage budget offers a lot of flexibility, and the values can easily be adjusted based on your personal situation. Perhaps you live in a quiet neighbourhood outside of the city, reducing your housing costs- but you want a nice car so you allocate the difference to that. Or maybe you live in the downtown core so living costs are high, but you dont need a car so transportation is minimal. Maybe you’ve paid off your mortgage so you’re willing to allocate more to higher risk investments.
This is the beauty of a percentage budget, it can work for almost anyone, as it can be easily tailored to suit most needs.
While percentage budgeting can be a great tool when properly employed, it can pose difficult for low income families whose budget is stretched thin from their home and car payments. It will also be difficult for any individual who has taken on too many expenses. We see this time again with professional athletes that make millions, but end up in bankruptcy, due to poor spending habits and underestimating their contracted expenses.
So how do you cut out required expenses? Its much easier in theory then in practice. A good first step is to sit down and assess your recent spending (one month) and really ask yourself, what can you afford to cut out without suffering?
The answer to this question will be different for every individual, and ultimately being successful in managing your budget means tailoring your own specific formula. It means being honest with yourself about the situation you are in, and understanding which aspects can and should be improved on for your benefit. Then repeat that to yourself again and again, until it becomes second nature. Understand the fundamentals, then make it work for you to gain control of your finances.
Blog March 14, 2017 No Comment(s)

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