For your convenience I link to many of the products I mention. Many of these links are affiliate links which means I may earn money if you purchase a product I recommend.
How To Set Up A Percentage Based Budget:
A percentage based budget is a simple budgeting system based on three categories:
It is literally that simple. I recommend reading Is A Percentage Based Budgeting Plan Right For You before starting this post to make sure this is the right budgeting plan for you.
To get started please download my Printable 50/30/20 Budget form:
1. Monthly Net Income
Your monthly net income is how much money you bring home every month. Many people have deductions already removed from their check, including retirement contributions, HSA funding, and medical insurance.
You can either base your budget on the actual amount you receive each month, or add the extra’s back in.
Either way will work, but I believe you get a more accurate picture when you add the numbers back in.
So for example:
Let’s assume my take home pay is $4,000 per month, after all of my deductions.
My current deductions could be:
- Medical and dental insurance – $800
- HSA Funding – $100
- 401K Funding – $600
So my true take-home pay would be $5,500
This amount goes at the top of your sheet and is the basis of your budget.
2. Monthly Needs:
Determining your monthly needs is a critical part of the budgeting process. I recommend going through your last few months of spending to get an accurate picture of what you have spent.
Don’t just estimate; trust me, when I say you won’t get it right. Pretty much everyone underestimates how much they spend.
Your monthly needs are the must have’s in your life. They are the basics like food and shelter. This would also include stuff like utilities, insurance, car payments, credit card payments.
Needs include all of the stuff that must get paid to keep your life going.
The major caution in this area is to separate your wants from your needs. You may need some new clothing, but that doesn’t mean you need to be buying clothing at Niemen Marcus.
I have to have the internet since I work from home, but I have friends who consider the internet a luxury.
Everyone’s wants and needs are different. What matter is that you are honest with yourself regarding your real needs.
These are items I include in my Need portion of the budget:
Needs – 50% of Income – $2,750
Fixed Expenses (Items with a set monthly payment)
|Insurance – Car/Medical/Life/Home/Renters||$600|
|Credit Card Payment||$100|
Semi-Discretionary Spending Items (Items that may vary slightly month to month):
Depending on your needs you may also include some of the following items:
- School fees and other child-related expenses
- Vehicle or home maintenance
- Charitable Giving
Total of all of your needs: $2,750
Depending on your needs, you may have to allocate a larger percentage of your budget to this portion.
These percentages are perfect world numbers. Very few people can actually make these percentages work when they first get started.
The goal is to work on your budget until these percentages actually work. You may need to pay off debt or change your percentage allocations in the beginning.
Want Portion of the Budget:
Wants – 30% of Budget – $1,650
|New Gear for Hobbies||$100|
|Savings for Various Extra’s||$300|
Total of All Your Wants: $1,650
Everyone’s wants are different, but this is the area with a high amount of discretion. The main goal in this area is not to go above your allocated percentage and dip into your savings.
For example, notice how high the miscellaneous expenses category is. With the percentage system, you don’t need to be tracking every little expense. It is okay to throw the random stuff in one category as long as you stay within your percentage guidelines.
Savings portion of the budget
Saving – 20% of Budget – $1,100
Depending on your current financial situation I have different recommendations for this area.
- If you are in consumer debt and actively working to pay it off, I recommend having an emergency fund of $1,000 and them putting the rest of your money towards debt reduction.
- Once you are out of debt, I highly recommend creating an emergency fund, which should be 3-6 months worth of expenses.
- Now for the fun stuff. Once you have paid off your debt and created an emergency fund, having 20% of your income going towards savings is the best thing ever.
So depending on your situation you could have any of the following items in your Savings bucket:
|Other Saving Goals (Home, Car, College)||$200|
If you were out of debt this may be how your Savings bucket will look:
|Other Saving Goals (Home, Car, College)||$200|
Total Saving: $1,100
Saving money is the most important key to financial success. Once you learn to delay gratification and put yourself first in the spending equation you’ll have an easier time getting ahead.
Keep it Simple
The percentage based budgeting system works because of its simplicity. When you keep everything simple and easy you’ll have a significantly easier time managing your budget.
The best part is that simple budgets are easy to keep.
Even though it is a simple budget to manage, you still need to hold yourself accountable to hitting your percentages. You also need to keep a close eye on your wants and needs. It is very easy to confuse a want with a need.
Good luck with your budget!
If you are interested in the traditional budgeting methods you may want to check out these posts as well:
- The Two Unbreakable Rules of Budgeting
- Why You Need a Budget Now
- What I learned from Busting My Budget
Percentage Based Budgeting Worksheet
Free Downloadable PDF - Percentage Based Budgeting Worksheet