How to Determine Budget Categories and Percentages
When you are working towards gaining control of your finances, a budget plays a key role. Many people did not learn how to properly handle their finances. It is not something that we are taught when we are younger. It is something that we have to learn. One of the best ways to understand how a budget can work for you is to learn more about budget categories and percentages. Continue reading this article to find out more about how budgeting can work for you.
Budgeting can help you determine how much money you can spend in each area. There are a number of ways that you can budget your money. There are some common types of budgeting, one of which is using budget categories and percentages. The rest of this article digs into how to create budget categories and the percentages that go along with the categories.
Determine Budget Categories And Percentages
With the various budgeting options available, you are probably wondering why you should consider budget categories and percentages as a top choice? It may be surprising but using percentages allows you to get a more holistic view of your entire financial situation. It also allows you to be a little more flexible.
When you use dollar amounts, if you have a rough month with less income or an incredible month with a high income, dollar amounts do not allow you to be flexible. When you use dollar amounts, it is a set amount. When you use percentages, it gives you much more flexibility. You can also adjust the percentages as your goals change.
Things happen all the time that we cannot predict and allowing for some flexibility decreases the amount of stress you may feel when it comes to your budget.
Here is an example with numbers:
Budget with dollar amounts may look like this:
$4000 in INCOME
$1000 to Housing
If you have a rough month, and you only earn $3000, what happens because your budget is set up to give a certain dollar amount to four places. You obviously must rework your budget and determine where the money is going based on how much you have.
When you use percentages, it is more like this:
$4000 in INCOME
25% to Housing
This way, no matter how much you have coming in from month to month, you are still using 25% of it for each of the categories. The amount is flexible and shifts for you without you having to redo your entire budget.
What Categories Do I Need?
When you are trying to determine which percentages you should assign to each category, you must have a good understanding of the categories. There are some common categories that apply no matter which budget type you select.
These basic categories include:
There are other expenses that you should also consider. They include:
The list could continue. It is important that when you are determining which categories you need that you look at your own spending needs. Sit down and write out all of the items for which you pay per month. Do not skip a single one. It is important that you list every expense. Once you have them written out on paper, you can put the like expenses together in categories. You can use the ones listed above as a guide for which categories you should have.
Best Way to Set Percentages
There is a basic standard for percentage-based budgets.
It often breaks down this way:
When you are bringing home $4000 in income, this is how much money you can spend in each category.
While the above is a fairly standard budget, it does not leave much for housing costs. It does give you a fair amount of money per month for food and entertainment. You could be more restrictive for your entertainment and put that in your housing costs.
There is a more aggressive way to budget. This may be a great option for someone that is working on a debt reduction or heavy savings plan. It does limit all of the other things you do, so you want to make sure you can stick to this budget before you take it on.
It looks like this:
In dollars, it looks like:
This is a much more aggressive budget to help you save money or pay off debt faster. If that is your goal, you may want to use this type of budget.
How Can Budget Percentages Help Me Reach My Goals?
Once you have your goals written down, it is time to determine how much money you need to make that happen. Once you determine how much money you need, you can see if it fits into your budget percentage. If not, you may need to make some adjustments. You can adjust the timeframe in which you want to achieve your goal. You can also adjust your percentages.
If you have $10,000 in debt, but you want to pay it off in eight months. That means you must pay $1250 per month to get that debt paid.
With this aggressive budget, you can pay off your debt in the timeframe you selected. You may even be able to pay off your debt earlier than eight months, but keep in mind that this is an incredibly strict budget.
Keep it Realistic
It is important to make sure your budgeting goals are realistic. If you want to eliminate your debt, you may seriously consider eliminating certain items from your budget, or making the allowable amount small, so you can focus all of your money on reducing debt. While that is admirable, it is not the best way to go because you may set yourself up to fail. In some cases, you may try to restrict your spending so much that you are not allowing yourself to have any fun, or purchasing enough food to last you the entire month.
You may find yourself even more tempted to spend money because you have restricted yourself so much. When you restrict yourself too much, and you find yourself unable to reach your budgeting goals, you may become frustrated and completely give up. It is better to start from a less restricted budget and work with that and then determine if you can further restrict it.
Visualize Your Budget.
Budgetry Can Help You Do That.
How Do I Determine My Goals?
You may know that you need to get your budget under control, but are still unsure about where to start. There are some easy steps you can take to get you to a good starting point. The first step is to figure out your goals. It is acceptable if you have more than one financial goal. Many of us do. Write down your financial goals and try to be specific about them. For example, you may want to pay off your credit card debt.
When you determine that is a goal, add a timeframe to it. Do not worry about if it is manageable at this point, just create the goal. After you have all your goals and their timeframes written down, put them in priority order, if you can. If you cannot, then you can presume that all of the goals must happen at the same time. You should know that means it will be harder to reach them and may take you a little longer, but as long as you know that upfront, it should be manageable.
Where Can I Find Extra Help?
Budgeting can be a challenging undertaking. It is a learned behavior that many people do not learn until they become adults. The good news is there are many resources that can help you on your path to budgeting. You have many resources available at your fingertips and can quickly access some of the best budgeting tools.
The Goalry Mall is an excellent source for help when it comes to understanding budgeting and selecting the best budget for you. We offer a money budget app that shows you how your budget is helping you save money or pay off your debt. In addition, we have many resources all in one site that you can access to provide you a wealth of knowledge about smart money choices.
Conclusion
Throughout the article, we have mentioned that budgeting is challenging. There is no way around the fact that this is hard, but that does not mean you should not do it. Budgeting is worth the sweat, time, and possibly tears that you spend trying to get your budget set up. Gaining control of your finances is the most freeing feeling you can have. No longer will you be controlled by your bills and debts, but you will be in control. That is a priceless place to be. You will be happy you took the time to do it, even though it is hard in the beginning.