Budgets are unique to every individual. The sets of numbers for each budget category is not universal and must be adjusted to your monthly income. Using budget percentages is a good option, even if you don't like math. Having the right budget percentage can make reaching your financial goals more accessible and achieve them faster.
Why Use Budget Percentages?
Using a pre-determined dollar amount for your budget is good to help prevent you from overspending. However, percentages give you a better analysis of your spending habits.
For example, let's you have a monthly income of S$5,000. Your rent is S$2,500, which is a reasonable rate. S$2,500 divided by S$5,000 is 0.5. 0.5 times 100 gives us a percentage of 50%. In other words, your rent is 50% of your income. Woah, that's astronomical! The actual cost of your rent may be reasonable, based on the number of bedrooms and its local to the city center. However, compared to your income, you absolutely cannot afford it!
Budget percentages supply an excellent overview to see how your spending compares to your income.
How to Estimate Budget Percentages
You can find numerous suggestions online on how to set up your budget percentages. Let's take a look at a sample budget:
- Housing 25-35% - Insurance 10-25% - Food and Beverage 10-15% - Transportation 10-15% - Utilities 5-10% - Savings 10-15% - Entertainment 5-10% - Clothing 5% - Personal Care 5-10%
As you can see, the categories may have a percentage range. Be sure that all of your percentages add up to 100%. Additionally, these numbers will vary depending on the size of your family, your geographic location, and your financial goals.
Some financial experts recommend budgeting 10% of your monthly income for miscellaneous expenses. In other words, this category gives you wiggle room for things you forgot to include in your budget. Obviously, if you add a miscellaneous category, you will need to deduct that amount from the other budgets.
You will also need to account for seasonal expenses in your budget, such as car insurance premiums or annual property taxes. You may also want to travel once a year. Depending on your situation, you may either take that money from savings or sacrifice your entertainment budget to help fund your vacation. The money for these costs must come from somewhere. Setting up your budget percentages is not a one-time event. It is advisable to analyze your spending regularly and make modifications as needed.
To have the most accurate budget percentage, you will need to track your expenses from month to month. I recommend a budgeting app on your smartphone so that you can track your credit card purchases and cash transactions together. Alternatively, you can record your purchases in a spreadsheet document. Keeping all your receipts will help you avoid missing any transactions.
How Budget Percentages Help You Achieve Your Goals
Now that you have your monthly budget percentages, you can multiply that rate by your monthly income. Compare the dollar amount against what you are actually spending, as recorded in your spreadsheet or smartphone app. Are you spending more than you should in a particular category?
Most of us will have fixed expenses that cannot change. For example, we cannot trim down our mortgage payment. Instead, we can decrease our spending on variable expenses.
Variable expenses are costs that can change. For example, your electric bill may vary from month to month. A few other variable expenses include food, clothing, and entertainment or recreation. Essentially, you have control over how much you spend on that category. For instance, I have a reasonable measure of control over how high or low my electric bill is. If I charge all my electronic devices and leave the television, lights and air conditioner on all month, my bill will skyrocket. On the other hand, if I turn off the lights after I leave the room, minimize how much I watch television, and only charge my electronic devices when absolutely necessary, I can slim down my electric bill. It is a variable expense.
You can use your budget to achieve money goals. For example, let's say you want to save enough for S$20,000 for a downpayment on a new car. You want to achieve this goal in two years. S$20,000 divided by 24 months works out to approximately S$833 a month.
If your monthly income is S$5,000 a month, saving $833 a month is approximately 17% of your income. The maximum recommended percentage for savings is 15%. That's not too far from your goal! Now, can you slim down your clothing budget to allocate an additional 2% for your savings? How can you move some funds around to achieve this goal?
By knowing what you can afford using budget percentages, you can adjust your accounts to fit your situation.
Having your budget percentages laid out also gives you data to analyze your spending habits. You can then ask yourself critical questions:
- Which categories are fixed? - Which categories are variable? - Which categories will increase in the future? (For example, if you are about to welcome a new member into your family, your housing budget may increase as you contemplate moving to a larger home.) - Which categories can I decrease to compensate for a bigger housing budget?
Budgeting well is not a restriction but allows you to control how your money is spent. It gives you more power to decide what you can afford and how you will get it. By keeping track of your spending, you will quickly know when you are over budget and ruining your plans for that Japan trip next year. Budgeting percentages also give us a reliable summary of what we should be spending and how we can make adjustments to afford that new car in a few years.
Remember that these budget percentages are only sample ranges. The cost of living varies from city to city, and each family's needs are different. You will need to adjust each category to fit your family's situation. However, this is a useful starting point to help propel your finances to achieve your money goals.