Over the past couple of years, some people have found themselves underemployed, while others have worried about losing their jobs. Many people have also lost control over their money — especially with the increased costs of goods and services.
How can you know exactly what you’re spending? With a well-balanced budget, you can finally begin to get a handle on your finances. But you can also take it a step further by setting budget percentages. Here’s how.
What Is a Well-Balanced Budget?
A budget is simply a plan for managing your money. It takes account of your incoming and outgoing funds. Budgeting helps you understand how much money you have and where you’re spending it.
A well-balanced budget helps you prioritize your spending so you have enough money to cover your monthly expenses. Your ideal budget is unique to you, based on your own priorities, values and choices.
Why Should You Use Budget Percentages?
When creating a well-balanced budget, it’s important to use budget percentages if you want to account for every dollar you earn and know how much you are allocating toward each percentage category.
What are the five budget categories? Basic budget percentage categories include savings, housing, transportation, consumer debt and monthly living expenses, such as groceries and utilities.
How To Set Your Budget Percentages
You should set your budget percentages in a way that works best for you. The popular 50/30/20 rule of budgeting advises people to save 20% of their income every month. That leaves 50% for needs, including essentials like mortgage or rent and food. The remaining 30% is for discretionary spending. But that doesn’t work for everyone.
Another option is the 60/40 budgeting method. With this method, 60% of your budget is focused on expenses you’re committed to each month, such as housing, food, transportation, insurance — and also other monthly reoccurring expenses, such as gym memberships and streaming subscriptions. The other 40% is split evenly between the following four categories: debt and long-term savings, short-term savings, retirement savings and “fun” money.
If the 50/30/20 or 60/40 budget doesn’t seem like it would work well for you, that’s okay. What is a good budget breakdown? Here are some guidelines on setting your budget percentages:
- Housing: 25-35%
- Food: 10-15%
- Insurance, such as life, medical, home or auto: 10-25%
- Transportation or auto services: 10-15%
- Savings: 15-20%
- Entertainment and leisure: 5-10%
- Health: 5-10%
- Clothing: 5%
- Personal expenses: 5-10%
Keep in mind that these are only recommended budget percentages for your monthly savings and spending. Find the right allocation for your particular financial situation. Begin by determining the percentages for your basic living expenses before allocating percentages to categories for nonessential expenses.
What Other Expenses Are Included in a Well-Balanced Budget?
Now that you know what your monthly budget percentages should be, you can break down some of the other expenses that should be included in your budget.
Can you cover a $1,000 emergency expense without using a credit card? Here are some examples of situations where an emergency fund is necessary.
- Major appliance repairs or replacements
- Last-minute travel
- Unexpected tax bills
- Medical emergencies
- Car breakdowns
- Job loss
Keep your emergency savings separate from your other savings to ensure you can cover unexpected events. Most experts recommend building an emergency savings fund worth three to six months’ of your expenses.
You might need to reconsider your budgeting percentages if you are also saving money for a specific goal, such as a down payment on a vehicle or home. For example, if you allocate 15% to 20% of your net pay to your savings goal and an additional 10% to your emergency savings, that’s 25% to 30% of your net pay going toward savings, which might put a strain on your budget.
Irregular expenses include any bills that are infrequent but easily predictable. These can be veterinarian bills, online subscriptions, vehicle registrations and insurance payments made annually or biannually.
How Should You Build Your Budget?
Building a budget isn’t difficult, but it does take time. Here are the steps you should take.
1. Determine Your Monthly Net Pay
Your take-home pay, also known as your net pay, is your income after the deduction of taxes, benefits and other contributions. In other words, it’s the money you’ll use to fund your budget each month. Some common deductions from your gross pay include the following:
- Federal, state and local income tax
- Social Security and Medicare contributions
- Retirement account contributions, such as 401(k), Roth IRA or 403(b)
- Medical, dental and other insurance premiums
2. Examine Your Account Statements
Take inventory of all of your bank accounts — including checking, savings and credit cards — to accurately identify your spending. This gives you a sense of your monthly cash flow.
3. Track Your Expenses
Maybe you know how much you earn, but do you know where every penny goes? Tracking both income and expenses gives you the whole picture. These steps can help you stay on course. You can use a online or printable budget template or spreadsheet, or you can invest in budgeting software to help you track your expenses each month.
4. Categorize Your Expenses
Start by grouping expenses into the categories mentioned above. Make sure to take into account both fixed and variable expenses. Fixed expenses are less likely to change from month to month, such as rent, mortgage, food or utilities. This can allow you to adjust your budget for more variable expenses, such as healthcare, clothing or travel.
5. Adapt To Changes
As you track your expenses, be prepared to make necessary adjustments as your financial situation changes. You may have to move money around to compensate.
Good To Know
Before breaking down your budget percentages, carefully consider your spending habits and savings needs. Tips such as the 50/30/20 rule can help you hone in on your ideal budget percentages and will lead to better money management.
Remember that what you include in your monthly budget depends on your own values, needs and priorities. These values can help shape your financial decisions when deciding on your budget percentages. Finding your perfect budget balance can help you save and spend with confidence.
Cynthia Measom contributed to the reporting for this article.