Today’s blog talks about how you use per cents for your spending plan. All of these plans are based on your take-home pay (money you have left after taxes have been taken out). The percent method is a good system if you are able to pay your bills but do not have money for extras like hair and nails and/or, if you’re not paying off debt.
There are several percentage methods. Again, choose the one that works best for you. You may need to try a couple of percentage methods.
The 80/20 rule may be good way to start if you are new to budgeting. It’s easier to track your expenses this way. It is less time-consuming than other percentage methods, easy to follow, and helps you save money quickly. The 80/20 budget has only two categories.
- 80% to needs & wants
- 20% to savings
This budget is great for paying for yourself first. You save 20% of your income and use 80% of your income for your living expenses, bills, and wants.
Another method is the 50-30-20 rule. This money planning system breaks your income down into (1) needs, (2) wants and (3) savings, either for debt repayment, an emergency fund or for a large purchase like a car or home.
- Needs: 50% of your after-taxed income goes here. These are essentials – rent, food, car, utilities, internet and phone. If you’re spending more than 50% on this, you need to make some changes. One way to stretch your hard-earned money to meet your needs is to take advantage of area resources like food banks, a free government phone and $10/month internet. Check out West Michigan resources.
- Wants: 30% goes here. You know what these are but let’s look at some examples. These include going out to eat, having a gym membership, buying new phone, purse or clothes. Be creative about your wants. Can you work out at home using a YouTube video?
- Savings: 20%. If you haven’t been saving, here’s an easy way to start. Set a goal of three to six months of rent as an emergency fund. The world’s been pretty crazy the last two years and you never know when you may not have a job. After that, you can consider investments and a retirement fund.
The 60-30-10 rule is a great method if you are able to pay off debt faster.
- 60% of your take-home pay goes toward savings, investments, or paying off debt.
- 30% goes toward your needs–housing, utilities, food, healthcare, and transportation.
- 10% of your budget to pay for “extras.”
Remember: all of these methods are based on your take-home pay after taxes are paid off. If you want to know how much tax will be taken out of your paycheck, you can go to the IRS website and figure it out. Or you can work with a professional, like an accountant. If you can’t afford one and need help, the IRS offers free tax return preparation to people who qualify.
It doesn’t matter what percentage method you use, as long as it makes sense for you. Remember: start out simple. After you get into the habit of budgeting, you can take the next step towards a more detailed budget.
The first time you set up a budget will be time consuming but doing it well will be worth our time. There are two visuals that will help you see where your money is going. One is a budget template or worksheet. It can be as simple as an Excel sheet. It will make budgeting easier from month to month.
An alternative to a budget worksheet is a budget calendar. You already know how to keep track of your events and appointments. A budget calendar works the same way. You keep track of your pay days and the due dates for your bills. You can use it to schedule dates to transfer money into savings. It doesn’t matter how much you transfer. As your saving grow, you will be encouraged.
Just like there are several ways to budget, there are several ways to set up a budget calendar. It can be a paper calendar, a digital calendar or an app. We will look at various apps next time. For now, have fun with your budget calendar by color coding. Again, there is no right or wrong way. The right way is what works for you.
For income, if you get paid more than once a month, use a different color for each paycheck and which bills will be paid check. For expenses, use one color for monthly bills and a different color for weekly purchases, like groceries and gas.
Don’t forget to transfer money into savings. You might think you don’t have savings or need any but you do. Start a car fund for a new used car or for car maintenance. You should have an emergency fund, a fund for Christmas and birthday gifts and for a vacation. You know these are coming; plan for them in advance. You can use one color for savings or several colors; one for each of these different types of savings.
Don’t overthink it. Just get started!! Make changes to find a method and visual that works for you. Life is ever-changing, so review your budget monthly and as life happens. Make whatever changes you need to make to accomplish your goals, help you stay organized financially and help you have peace of mind that you have a spending plan that is working.