Almost all financial experts advise that you have some type of budget in place in order to make sure you spend your money wisely. For many people, however, the drudgery of sitting down and creating a monthly budget is simply too much and it is too difficult to get motivated. For others, creating a budget is a hassle and they don’t end up sticking to it once they have made one. If you are one of the many people who struggle with the very idea of budgeting, using a simple percentage-based budget plan may be the best choice for you.
A Percentage-Based Budget Plan
A percentage-based budget plan is a plan in which you simply allocate a certain percentage of your money towards a specific category of spending. As long as you keep your cash within those percentages, you don’t have to worry about where each dollar is going or how you are spending within each category.
A percentage-based budget is thus essentially a big-picture budget. You only worry about whether you are doing the right things with your money to achieve your financial goals and you don’t worry so much about your day-to-day use of your cash.
The 60-40 Solution
The 60 percent solution is one of the simplest methods of percentage based budgeting available. Those who use the 60 percent solution simply limit their total spending on committed expenses to 60 percent of their incomes. Committed expenses each month include household expenses (mortgage or rent, utilities and other required home costs); insurance premiums; food and clothing; charitable giving; taxes and all bills, including bills for things such as cell-phones and satellite or cable TV.
The remaining 40 percent of the money is then divided up into four different categories: retirement savings, long-term savings, short term savings and fun money. Typically, fun money and short-term savings would be limited to 10 percent each, and the remaining 20 percent of your income would thus be saved. This is in line with most financial experts, who recommend saving a full 20 percent of your income.
To ensure that you keep your percentages in place, you should set up automatic deductions for as many different categories as possible, including your bills and your savings.
The Balanced Money Formula
The balanced money formula is a similar concept to the 60 percent solution, in that you also work off of percentages and don’t have to account for every dollar. The basics of the balance money formula are that you allocate 50 percent of your after-tax income to your needs; 30 percent of your after-tax income to your wants and 20 percent of your after-tax income to your savings.
Under this formula, needs are things you have to have, including housing and insurance. Wants are other things you would like to have, such as cell-phone service, designer or fancy clothing, meals out or other luxuries. Finally, savings should include retirement savings as well as other savings for the future.
Choosing a Percentage-Based Budget
The best thing about either of these percentage-based budgets is that you remove the stress from the budgeting process. Instead of worrying about whether to allocate $100 to entertainment and $50 to dining out or vice versa, you can spend on pretty much anything you want as long as you stick to only spending a percentage of your income. This gives you a great deal of flexibility as your needs and lifestyle change, but ensures that your overall financial picture remains on track.