The percentage budget is one of the easiest budgeting systems to implement.
I’ve used all types of budgeting methods at various times in my life. Some have worked better than others, this is one of the winners.
The basis of my current budget is the 50/30/20 method.
The percentage budget works well for people who are used to budgeting and have learned to control their money, rather than having their money control them.
It allows for more flexibility and freedom and doesn’t require as much tracking.
However, its simplicity can cause issues if you aren’t budgeting properly.
- The lack of tracking can make it easy to hide spending problems.
- It doesn’t require the same level of self-control.
- Many people find they spend more money when using this method.
The percentage budget is best used when you have a clear understanding of the differences between wants and needs.
How the 50/30/20 Budget works:
The simplest way I’ve heard the 50/30/20 budget explained is:
- 50% of your take home income goes towards your needs
- 30% of your take home income goes towards you wants
- 20% of your take home income goes towards savings/retirement
The biggest program is learning to differentiate your wants and your needs.
Your basic needs are tied to food and shelter, once you have those items taken care of then you build from there.
For example, my basic food budget is typically around $300-325 right now. When I’m eating healthier or hosting BBQ’s my numbers increase. That increase is a want, but the basic food budget is a need.
Here is how I’ve chosen to break down our budget:
50% Of My Income:
This portion of my income goes towards all of my fixed expenses and a portion of my discretionary expenses.
For example, fixed expenses could include:
- Mortgage/rent payment
- Insurance Payments (medical, car, home, life)
- Car Maintenance
- Basic Clothing
If you have consumer debt (cars, credit cards, student loans) then your minimum payments for each loan should be included in this area.
This portion of the budget is for all of your bills and expenses that must be paid each month.
30% Of My Income
This portion of my income is devoted to the fun things in life, the little extras that make life a bit more enjoyable.
This is where I place the following items:
- Fashion Clothing
- Camping gear
- Eating out
You get the idea, this is the fun category. This is where you really need to understand the difference between a want and a need.
For example, some form of a phone is a need, but a fancy smartphone is typically considered a want.
I went into a lot more detail on how to determine wants and needs in one of my most popular posts. Want or Need, how to control your spending.
20% Of My Income
This portion of my income goes to savings and investing. This is the part I love. I’m just nerdy enough to love the investment side of the equation.
We split the 20% between retirement accounts, college funds, and a new vehicle fund. Obviously, your savings needs may be different.
If you don’t have an emergency fund, I recommend starting there and then adding to the additional savings accounts.
I’m a very, very firm believer in saving, I’m even more of a believer in an emergency fund. If you are just starting out, save $1,000 as a starter emergency fund. If you are consumer debt free, I recommend 3-6 months of savings.
You can read more about the savings aspect in these two posts:
Why the percentage based budget system works
The 50/30/20 budget is the easiest budget to manage in my opinion. It is simple, straightforward and quick to set up. The lack of category tracking saves time and makes it easier to stay within the guidelines.
It allows for a certain level of freedom that traditional budgets don’t include. It is easy to adjust the percentages based on your individual needs and financial situation.
However, that freedom can be dangerous if you aren’t managing your money properly and paying attention. If you choose to use this budget, don’t be surprised if you spending increases.
I’m not a perfected budgeter, I’ve made tons of mistakes over the years and through trial and error finally found a budget that works for us.
Aaron’s salary is partially commission based. I use my part-time salary and his base salary to pay our basic living expenses using the 50/30/20 method and then the irregular budget to fund the extra wants and saving needs.
I don’t think the type of budgeting system you use matters as much as the fact that you are actively using a budget.
I’ve found that when I use a budget I make significantly better financial decisions. I pay more attention to my money and am more responsible with my spending.
If you are interested in learning about other budgeting methods please check out these posts:
- How to budget if you have an irregular income
- Two unbreakable rules for budgeting
- How to create a budget
You are also welcome to download my percentage based budget tracking form. It is a simple one-page form that will make the budgeting process even easier.