Why You’ll Love a Percentage-Based Budget

by Will Lipovsky · 0 comments

How would you like to spend whatever amount of money you desire?

Therein lies the beauty of the percentage based budget. With this type of budget, no amount of spending is too much. No longer do you have to restrict yourself to a certain neighborhood because it’s cheap. No longer do you have to deal with a junk car. Everything you want – you can have.

I’m not blowing smoke.

Most budgets have limitations. For instance, let’s say you have $400 in a monthly clothing allowance. It’s $400 each month no matter what. Regardless of what you earn.

The percentage based budget functions much differently. Instead of limiting yourself to hard numbers, you simply spend a percentage of your income.

Let’s say after researching, you find out it’s wise to spend 5% of your monthly budget on entertainment. If you earn $5,000 per month, that’s $250 per month spent on entertainment. Do you think that’s not enough? Here is your solution… finds ways to earn more money. This way, your entertainment expenses don’t get out of hand but you still have the ability to spend a lot. For instance, you know that your number is 5% so you need to earn however many more dollars each month in order to meet your goal.

What you may have noticed is that this is a safe type of lifestyle inflation. It’s hard to get in trouble using this budget. Think about it like this. Someone in the neighborhood next to yours may live in a million dollar home. To you, that’s ridiculous to spend so much on a home, but they may actually spend a smaller percentage of their income on their home than you do. See, getting whatever you want doesn’t mean you have to blow your budget. It just means you need to earn more if you want to spend more without risking bankruptcy.

This type of budget is also very handy if you’re a little too frugal. I fall into this category. I’m 26, but I still live about the same lifestyle as I did in college even though I’m far more stable financially. I have this slightly inconvenient mindset of being poor, and it’s hard to shake. So what I’m working on is creating my own percentage based budget. I’m trying to give myself the opportunity to spend more.

pie chartOne budgeting category I’ve read a lot about is self-improvement. Many experts believe a person should reinvest 3% of his or her earnings back into themselves. This means I could go to conferences, buy all the audio books I could ever want and still have money left over. Without this type of budget, it would be hard for me to realize it’s possible. I would still be thinking, “Jeeze, $500 is a lot to spend on a 3-day conference.” It’s pretty awesome when you can spend money in a completely responsible manner. That feels good.

Here are the types of people who should especially embrace this type of budgeting:

Freelancers – Freelancing = a variable income. When your take home pay fluctuate, percentages work nicely. If you don’t earn as much the previous month, you can readjust your percentages to reflect the shortcoming in the following month. This may be done by not buying deserts the next month, or cooking every meal at home, or not taking that weekend trip to California.

Those with Friends Who Want to Discuss Budgeting – Talking money with friends can be awesome. You can motivate and support each other, but it can get really awkward if your incomes aren’t nearly identical. That’s why it’s best to talk in terms of percentages. You and virtually anyone can talk about their finances openly if percentages are used. This is also handy to use if you’re shy about giving specific numbers.

Minimalists – This is me. I find it hard to spend money on frivolous categories, even if that “frivolous” categories add immense emotional value to our lives. If I agree to budget a certain percentage of my income to the fun categories, it’s easier to go ahead and have fun. You gotta stick to that budget, after all!

You Want to Safely Embrace Lifestyle Inflation

Lifestyle inflation isn’t always a bad thing. For instance, in college you may have stopped getting dental checkups because you couldn’t swing the cost. But now that you have plenty of money for something so basic, it might be wise to go back for six month checkups.

A Challenge

A challenge is that you cannot copy anyone else’s budget exactly. For instance, 25% on housing may not work if you’re a college student. You may need to spend more like 75% of your income. That’s why it’s important to develop a budget that works for you. Be real with yourself. Discover where you can reign in the expenses and where you can encourage yourself to spend a little more. Enjoy the ride.

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