If you are serious about managing your money, you need to start by creating a budget plan. This is one of the basic tools that you need to use in order to get your finances in order. According to an article published on PewTrusts.org, our expenses are key to the household balance sheets – but it is an element that is often overlooked. Sometimes, people focus on their income to determine their financial security. That is not entirely a healthy habit. You may have a 6-figure income but if your expenses go beyond that amount, you will always be in the red and your finances will never be secure.
The same article from Pew Trusts revealed that for the past years, our expenses have grown way beyond our income. With the salary increase trailing behind the household expenses, you can be certain that we are more prone to overspend than in previous years.
This is one of the main reasons why you need a budget plan.
While a lot of people acknowledge that this is an important habit to develop in financial management, not everyone does it. Apparently, some people find it hard to create and maintain a budget. The truth is, budgeting can be tedious at first. You need to monitor your actual spending so you can determine how you will create your budget. Once you have an idea about your spending behavior, you can easily point out how you can improve your financial position through budgeting.
What you have to understand is that there are a lot of strategies that you can use to make budgeting easier. There are complicated budget plans but there are also simple ones for those who do not have the time nor patience to commit to a budget.
One of your options is a percentage-based budget plan.
How percentage-based budget will make budgeting easier
This type of budgeting is simple because it relies on the percentage of your income to determine your spending limitations. Most of the time, people would set specific amounts in their budget. For instance, their food budget each month would only $500. Their housing budget will only be $1,200. The clothing will only get $100. The entertainment will only get $100 – and so on.
In a percent-based budget, you will use percentage rates for each category. For instance, your housing budget will be 25%, food 10%, utilities 5%, savings 10%, debt payments 10%, clothing 5%, transportation 10%, and so on. While there are recommended percentage rates per category, it will depend on your personal lifestyle.
So what makes a percentage-based budget plan so special?
Your spending will not feel too restricted.
When you set actual amounts in your budget (e.g. $500 for food, etc), that feels restricting somehow. In fact, an article published on USNews.com, one of the reasons why some budgets fail is because they are restricting. The way it controls your budget with set amounts can be limiting. But if you think about your food budget as 10% of your income, it seems limitless somehow. This is just in your mind of course. No amount of spending will seem like it is beyond what you can afford. As long as you stay within your budget, it should be alright. That means you can splurge as long as your income gives you a little bit more to spend.
All spending categories can benefit from windfall money.
Any unexpected amount that you will earn will not just benefit one category. Sometimes, we just put everything into one expense – like a shopping spree, vacation, debt payment, or saving. While there is nothing wrong with that, you will not really enjoy this windfall money. In a percentage-based budget plan, all your spending categories will benefit.
If you need to spend more, you just have to earn more.
In case there is a need to spend more on one category, you can increase your income so the budget for your other expenses will not be affected. Earning more will not only give you more money to spend on the category you want to increase spending. It will also give the other expenses more room their respective budgets.
It allows you to enjoy a lifestyle inflation without compromising anything.
There are financial experts who warn us against lifestyle inflation. It is very important that we be careful of any inflation that we will implement in our lives. Sometimes, Americans have the tendency to upgrade their lifestyle after an income increase. While there is nothing wrong about enjoying your hard earned money, you need to be smart about it. When you practice percentage-based budgeting, you can practice lifestyle inflation without compromising the priority expenses. All you wants and needs will get an equal boost – which is a great way to upgrade your lifestyle without compromising anything.
Forces frugality to have some room to spend more – wisely.
Sometimes, too much frugality can lead you feeling burnt out. As mentioned, it is okay to succumb to lifestyle inflations – as long as both wants and needs go through an increase as well. A frugal state of mind will not feel guilty about spending more on entertainment because they increase their budget for savings too.
Here is a video that provides tips on the recommended percentage that you need to place in your budget plan.
How a defective budgeting strategy can ruin your finances
Although a budget plan is very important, it is also vital for you to choose the right budgeting strategy that fits your financial position and personality. You need to factor in the last part because, in the end, it is your personality that will help you stick to your budget.
According to the data published on Gallup.com, only one out of three Americans have a detailed and formal household budget. This was back in 2013. The rest do not have a budget plan.
But what exactly is the negative effect of not budgeting? Here are some of them.
Higher chance of overspending.
A budget helps you track your income and expenses. That being said, it is the key to helping you control your spending so you will not go beyond your income. When you have a clear idea of how much you are earning you will know your limitations when it comes to spending.
Making wrong decisions.
Most of the time, our ignorance lead us to make the wrong decisions. If you do not have a budget plan, you wouldn’t know how much you can afford for a particular spending category. Since you know your income and expenses, it is easy for your to make the right decisions about your money.
Running out of money for priority expenses.
When you overspend, you need to get that money somewhere. Some people will keep on spending their cash – until such time that they realize they run out of funds for their priority expenses. These expenses are the main reason why you need to keep tabs on your money in the first place. You have to make sure that these are met because there are usually unpleasant consequences if you are not able to pay for your priority expenses.
Being forced into debt to meet expenses.
If you ever run out of money to pay for priority expenses, the natural reaction is to go into debt. After all, where do you think you will get the money from if you spend beyond your income? You will either dip into your savings or you will borrow money to meet your needs.
Failing to meet financial goals.
Finally, the last consequence of not having a budget plan will be on your financial goals. If your goal is to save up for something, it would be very hard to do if you keep on overspending. Your budget will help you set aside an amount to meet your financial goal each month.