To budget, or not to budget. That is the question.
Many people don’t enjoy sitting down and taking a close look at their finances, and who can blame them? Compared to spending money, tracking your spending can be a lot less fun.
As an online direct lender, we understand the importance of budgeting.
If you’ve never created a budget before, you may not know the first thing about planning for your monthly expenses. Although it may be easy to set limits at first, you might eventually struggle to keep up with these limits if your budget is unrealistic.
That’s where a percentage budget may help. This method creates structure for your budget, so you can cut out some of the guesswork. Try following one of the three methods below to get started.
Picture Your Budget as a Pie Chart
Before we begin, imagine you’re in a boardroom watching a presentation. The presentation is all about your spending, and there’s a pie chart on the screen to illustrate how you spend your money.
It shows each category of spending, allotting a portion of your income to everything from housing costs to clothing allowances and everything in between.
The pie chart may have different categories of varying sizes.
Everyone’s budget will most likely look different, and the percentage each category takes up will be unique. For example, rent or housing costs may take up a significant chunk, while a streaming subscription like Netflix — even after its latest rate hike — may only take up a small sliver.
That’s where percentages come in handy. Like any pie chart, each slice shows the percentage of the total pie, so you’ll always know how much money is allocated to each category.
The trick is setting limits for each category, so your budget works with your finances.
Method 1: The 50–30–20 Budget
The 50-30-20 method is one of the more common percentage budget methods and is sometimes one of the top results you’ll see if you research the topic. U.S. Senator Elizabeth Warren popularized this method in her book “All Your Worth: The Ultimate Lifetime Money Plan”.
The 50–30–20 Budget recommends you break down your after-tax income into 50, 30, and 20 percent portions.
Half of your income covers your essentials
The largest chunk of your personal budget should be used to pay for the things you need. Unlike a daily cup of coffee, these expenses are essential.
A helpful way to identify your needs vs. wants is by using Maslow’s hierarchy of needs. Maslow created a five-level pyramid to outline the common motivations of human behavior.
Maslow's hierarchy of needs works from the bottom up. You need to focus on building a strong foundation before you can move onto the rest, and the needs at the bottom are more essential than each layer above it.
Physiological needs make up the bottom two levels. They represent things like:
- Basic clothing
- Loan payments, if you’ve taken out payday loans online
- Rent or mortgage payments
- Utilities for heat, electricity, and water
Under this rule, you shouldn’t spend more than 50 percent of your income on the essentials.
30 percent of your income covers your wants
Moving away from your essential needs, the next largest chunk of your budget covers the wants. These are items and experiences you can survive without, but life might be less exciting without them.
Comparing this to Maslow’s hierarchy, the wants represent the next two levels of your pyramid: your self-esteem and your desire to be loved and belong.
In other words, it’s the money reserved for things like:
- A birthday present for a friend
- A pair of designer shoes
- In-game purchases for apps or video games
- A haircut at a high-end salon
- Your gym membership
- Takeout dinners
- A summer vacation
This is a broad category, so it might be easy to spend more than 30 percent of your current income on them.
If that’s the case, you should spend some time figuring out which spending habits you could cut out. Do you really need to that expensive haircut? Deep down, you probably know the answer is ‘no’.
If you can stand to sacrifice these wants, you’ll have more cash left over for the next category.
20 percent of your income is for savings
The final category of your budget is dedicated to savings. This coincides with Maslow’s final layer of self-actualization.
This portion of your budget could improve your financial freedom, giving you the ability to save and invest in ways that help you achieve your goals.
Whether that’s purchasing your first home, going back to school, or planning for your retirement, savings can help you accomplish these goals. Setting aside money can also help you make additional payments, if you’ve taken out installment loans online.
How the 50–30–20 Budget Works in Action
Let’s say you bring home $2,500 per month after taxes. Here’s what you should be spending on the following:
For some people, the 50-30-20 breakdown may be easy to budget for.
For others, it may be difficult, if not unrealistic in today’s economy. A lot of people are making less at a time when things cost more than ever.
Method 2: The 70–20–10 Budget
For that reason, the 50–30–20 Budget won’t work for everyone. One solution may be to scrap this breakdown and use the 70–20–10 Budget instead. It redistributes your take-home pay to adjust for inflation and higher costs of living.
Instead of 50 percent, 70 percent of your income covers the essentials we outlined above. That additional 20 percent gives you a little more breathing room.
Since it may be difficult to bring home 20 percent more money each month, this extra 20 percent comes from shifting your budget around. It siphons cash from your wants and savings, leaving them at 20 and 10 percent, respectively.
So, if you’re earning $2,500 a month, your budget breakdown would look like this:
Although this subtle shift might help you cover the basics, while still allowing you to have fun and plan for your future, it still may not be right budget for you.
Let’s think of our friends who live in San Francisco, where the average apartment rent is $3,609. The combined total of rent, groceries, and utilities may exceed 70 percent of their earnings.
Method 3: The 80–20 Budget
The last iteration of the percentage budget is also the simplest. It’s ideal for people whose current expenses don’t match up with the previous breakdowns, as it shifts your monthly budget priorities into two simple categories: savings and everything else.
If you make $2,500 a month, it would look like this:
With 20 percent devoted to savings, you have 80 percent of your income to cover your expenses. This non-savings category is a combination of both needs and wants, so it includes everything from rent and groceries to lattes and movies.
This works well if your needs take up 80 percent, or under, of your monthly income. Using the other budget methods, you might be overspending but according to the 80–20 Budget you’re still on track.
The 80–20 Budget also works if you don’t want to track individual expenses. If you don’t go over the 80 percent limit, you don’t need to track exactly what you’re doing with the remaining money.
Finding the Right Budget Percentage Breakdown
Money is personal. So, it only makes sense that your budget is personalized.
Your personal budget depends on a lot of variables — namely your cost of living.
Take, for example, San Francisco. Its infamous rental market is one of the most expensive in the country. The cost of rent, utilities, and groceries are higher here than most places in the U.S.
Someone living in the San Francisco Bay Area might typically spend a larger percentage of their income on these categories than someone living in, let’s say, Topeka, Kansas. While someone in the Great Plains may successfully follow the 50–30–20 Budget, someone on the California coast may be better suited to the 80–20 Budget.
The cost of living and the job market in your neck of the woods may influence the look of your personal budget.
What If None of Them Work?
For these breakdowns to work well, you need to make more than you spend. More specifically, you need to make enough money to cover not just your necessities, but also your wants and savings.
This is the balancing act of every budget, but when you aren’t working with enough money, it can be a challenge. You might struggle to cover just your basic needs, let alone everything else.
If you find yourself in this situation, you may have to put the percentage budget on hold while you ask yourself some questions like:
- How much rent can I afford?
- How much can I spend on food?
- How will I pay for something unexpected?
By asking yourself these questions, you’ll come closer to figuring out the amount of money you have available for important expenses and whether your expenses are within these limits.
This might not be an easy task. Unlike eliminating certain wants, there are expenses you won’t be able to scratch out of your budget altogether. You might have to find ways to lower your cost of shelter and food, as well as other necessities.
It may involve moving to a more affordable accommodation, making changes to your food spending, or getting a better paying job. These tasks may not be what you’d call a quick fix. Some of them are major lifestyle changes that take time and effort to put into practice.
If you need to adjust your budget quickly, try focusing on smaller changes until you can make big ones.
Some small changes may include packing your own lunch for work or cutting down on your social outings. This may free up extra cash you can put aside in savings.
If an unexpected bill or auto repair comes your way before you’ve had time to put money aside, online short-term loans may be a helpful backup to take care of urgent bills quickly. Depending on the lender or service provider, the application process can be quick and convenient.
Take some time to read up on these loan alternatives, so you know how short term loans work before you apply.
Always leave room for savings
However you reduce your expenses, try to keep some money aside for savings. A budget isn’t just a way to track the money coming in and out of your hands each month. It can also help you create a financial safety net.
Having an emergency fund can help you cover urgent expenses in addition to your regular bills and obligations.
If you’re faced with any unexpected, urgent expenses and don’t have enough saved to cover them, don’t panic. There are online loans that can help you bridge the gap when you’re low on funds.
There are many reasons why people get personal loans. As for online short-term loans, we recommend you use these in an emergency that you can’t otherwise pay for.
If an unexpected emergency expense pops up and you don’t have the savings to handle it, click here to see if a short-term loan is right for you.
Let Percentages Bring Structure to Your Budget
Don’t wing your finances. Spontaneity can be a fun part of life, but when it comes to your budget, you shouldn’t be making things up as you go.
When you don’t have rules to follow, it leaves a lot up to interpretation. And you may have a lot of questions, including:
- How much should I spend on rent?
- How much should I budget for food?
- How much should I save each month?
Without answers to these questions, budgeting may be intimidating. It’s a big job and you might not know where to start!
It’s not as hard as it seems — the three percentage budget methods provide a framework for your budget.
Sit down with your finances to find out which breakdown works best for you. Once you have the framework in place, you’ll be better able to create a budget you can stick to.