The right budget for you depends on your current money habit deficiency – either 1) spending too much 2) not saving enough, or 3) not having enough to spend (low income). One of the best ways to help mitigate against these situations is to use a percentage-based budget.
|Budget Strategy||Breakdown||Helpful For Those Who|
|50 / 30 / 20||50% Necessities|
|– Spend too much on personal expenses|
|60 / 20 / 20||60% Necessities|
|– Spend too much on personal expenses|
|30 / 30 / 30 / 10||30% Housing|
|– Don’t save enough|
– Try to manage a major monthly expense
|70 / 20 / 10||70% Necessities|
|– Don’t have a lot to spend|
– Don’t spend a lot on personal expenses
– Enjoy or are interested in giving/charity
|80 / 20||80% Necessities|
|– Don’t have a lot to spend|
– Don’t like to track expenses
– Are new to saving
A percentage-based budget is a simple way to begin the journey up your financial mountain, and can be helpful whether you’re a seasoned or new budgeter. Finding which percentage-based budgeting strategy is best for you depends on your needs and your current financial situation.
Which Percentage-Based Budgeting Strategy is Right for Me?
It’s not uncommon to face challenges with your money. Many Americans face some sort of instability regarding their finances. Generally, the major categories of financial difficulties break down in to the following:
- Spending too much – spending more than you earn
- Not saving enough – being unprepared for emergencies, financial crises, or retirement
- Not having enough to spend – struggling to pay for basic needs
If this sounds like you, don’t worry. You’re not alone in the struggle, and we’re here to help.
The beautiful thing about percentage-based budgeting is that there’s room to go as you grow. Adopting this budgeting strategy means that you can utilize it to help you get to where you want to go, by starting where you are today.
Budgeting Strategies for Those Who Spend Too Much
If you’re in a situation where you tend to spend too much money from month to month, the following budget strategies might be helpful for you:
It’s important to live within your means. But that may not match up perfectly with your money habits today. And that’s okay. It’s nothing to be embarrassed about because there are plenty of psychological reasons why it’s difficult not to spend money. The important thing is to recognize your current spending habits so that you can bridle them. A bridle is a piece of equipment meant to help direct a horse while riding. Spending isn’t bad any more than horses are inherently bad. But in a similar way, spending can be a vehicle for good in helping get you where you want to go. Bridling your spending habits helps you accomplish that goal.
Begin by inventorying your current monthly spend. How much do you spend on things that aren’t necessities? Is it 30%? 40%? 50%? How much do you spend on necessities (i.e. the things you need to live, like food, housing, etc.)? If you spend more than 30% on wants every month, try out the 50 / 30 / 20 budget. It’ll help you begin budgeting while still allowing some room for personal spending. It will also help you cut superfluous spending and help you focus on things that provide more value to your life.
If you spend more than 60% on necessities each month and more than 30% on personal spending, you can try the 60 / 20 / 20 budget. It’ll help you bridle that extra spending and cover your monthly needs first.
Both of these budgets will help you categorize a portion of your monthly after-tax income toward saving as well. Focusing on these three basic areas of your budget will help you stabilize your financial footing, allowing you to progress your budget from there. You can work to decrease your personal spending, increase your savings, or find ways to cut down on monthly necessities, and even learn to live life without spending money.
Budgeting Strategies for Those Who Don’t Save Enough
A significant portion of Americans have a difficult time coming up with money in a crisis. Whether that’s a medical emergency, being laid off of a job, or experiencing a personal or global financial crisis, not having money when you need it is dangerous. A helpful budget to mitigate against an uncertain financial future is the 30 / 30 / 30 / 10 Budget.
As a general rule, any of these popular percentage-based budget strategies can work as a starting point since they all call for saving at least 20%. We recommend the 30 / 30 / 30 / 10 budget here simply because it has the highest savings category of them all. If you’re new to saving in general, the 60 / 20 / 20 budget can be a good secondary option here as well. The link of spending the same amount (20% for personal wants and 20% for savings) each month can help subconsciously associate the two in your mind, linking the positive feelings you get by spending toward savings.
Overall, these budgets are a great way to get started. Begin by establishing an emergency fund ($1,000 minimum). Next, begin paying down debt and saving 3-6 months worth of expenses to protect against life’s surprises. Then begin saving and investing your money each month. Eventually, work to increase this percentage over time. Raises, bonuses, etc. can all help drive your savings vehicle. Begin to live comfortably and within your means, and be careful not to inflate your lifestyle.
Budgeting Strategies for Those Who Don’t Have a Lot to Spend
Many people struggle to pay their bills and save. When money comes in, it can leave just as quickly. The major challenge is having enough money to live off today of and preparing for a better future. However, if you never set your sights higher than the next paycheck, you’ll only ever have “the next paycheck”. Here are two helpful budgeting strategies to help you pay the bills and save:
The 80 / 20 budget is a good goal to strive for. If you’re unable to begin saving 20% of your monthly after-tax income, begin with a 99% necessities / 1% savings budget. Begin saving 1% of your monthly income and put it into a savings account. Next, work towards saving 5%. Then, 10%. And eventually, 20%. The hardest part will be getting from 1% to 5%. The next jump will be easier because you’ll begin recognizing the successes that got you the first 5%. And from there, you’ll make it all the way to 20% and beyond.
Another way to help increase your savings percentage is to look at the major categories of your expenses. Large portions are probably spent on things like food and housing. Whatever you spend the most money on, try to find ways to bring that monthly cost down. Cut down on housing by finding a roommate or downsizing your space. Lower food costs by meal prepping. Move closer to work to cut down on transportation costs. Whatever the case, managing your spending can help you find ways to increase your savings rate.
As you cut down on necessities, increase your savings rate or consider adopting a 10% category for things like donations or special fund financial goals (like saving for your future family or children’s college funds). Learning to give away your wealth or spend it on others can help you find happiness and meaning. You’ll become more grateful for what you do have, and will be blessed to see others succeed for your efforts in their behalf. See the 70 / 20 / 10 budget for how to apply these principles.
Where Do I Begin?
Whether you begin with the 50 / 30 / 20 budget or the 80 / 20 budget, the point is to begin! If one strategy isn’t right for you, try another. Just know that it’ll be difficult to get where you want to go tomorrow if you don’t know where you’re heading today. Read on for more details about each budget strategy to see which might be best for you.
Percentage-Based Budgets: A Detailed Breakdown
50 / 30 / 20 Budget
The 50/30/20 budget separates your monthly after-tax income into necessities, wants, and savings:
- 50% Necessities
- 30% Personal
- 20% Savings
The 50/30/20 budget is a helpful way to provide structure for those new to budgeting, without being too rigid to keep at over time. If you’re used to spending too much on yourself, the 50/30/20 budget can be a good beginner budget. It’s useful to help you reel in expenses if you’re prone to spending more than 30% of your monthly after-tax income on personal wants. Setting a cap on your personal spend will help cut out superfluous expenditures that don’t add to your overall well being. It will also help you find happiness by focusing on the things you want and value most.
|Monthly After-Tax Income||50% Necessities||30% Wants||20% Savings|
60 / 20 / 20 Budget
The 60/20/20 budget allocates your monthly after-tax income into 3 basic buckets:
- 60% Necessities
- 20% Personal
- 20% Savings
While the 60/20/20 budget system is similar to other basic budgeting strategies, it differs in the spending allocated to your personal needs (20%). This strategy can be helpful when working to cut down on personal expenses (from 30% of monthly spend or more). Its advantage comes in that you will be saving as much as you spend on yourself from month to month. As you see your savings grow over time, you may be motivated to save even more.
|Monthly After-Tax Income||60% Necessities||20% Savings||20% Personal|
30 / 30 / 30 / 10 Budget
The 30/30/30/10 budget breaks down into these four categories:
- 30% Housing
- 30% Necessities
- 30% Savings
- 10% Personal
Housing receives its own category in this budget since it is typically one of the highest expenses for Americans. You may spend more than 30% on housing each month. If you spend less on other necessities (<30%) that’d be okay. The idea with this budget is to keep your biggest expenditures manageable. If you pay more than 30% on housing or another monthly expense, consider cutting back. Perhaps you can rent out an extra room of your house, refinance your home, or split rent somewhere with a roommate. A little savings go a long way.
This budget helps you focus on increasing your savings while decreasing your personal spend each month as well.
|Monthly After-Tax Income||30% Housing||30% Necessities||30% Financial Goals||10% Personal|
70 / 20 / 10 Budget
The 70/20/20 budget breaks down your monthly after-tax income as follows:
- 70% Expenses
- 20% Savings
- 10% Donations
This percentage-based budget can be helpful if you currently have a low income and most of your take-home pay goes to expenses. It also can be an ideal budget for minimalists who don’t spend frequently on material purchases. The unique aspect of this budget is the 10% saved for donations or special financial funds for others. When you have enough monthly income for your expenses, you’re living within your means. When you save and invest, you create security and stability. But when you take time to donate and give a portion of your wealth, you create happiness. Not only for others, but for you as well. The 70 / 20 /10 budget helps you find happiness in what you have and in helping others.
|Monthly After-Tax Income||70% Expenses||20% Savings||10% Donations|
80 / 20 Budget
The 80/20 budget breaks down your monthly after-tax income into two categories:
- 80% Expenses
- 20% Savings
This can be great for budget-beginners, those who don’t like to track expenses, and those who might be budgeting off of a low income. It’s also a great strategy for those new to saving.
The 80 / 20 rule is a ‘pay yourself’ budget, where you take your monthly after-tax income and pay 20% towards your savings first. The rest of your money is available for spending. This is why the 80 / 20 budget has even been known as an “anti” budget – since you don’t need to budget the rest of your money.
An easy way to apply this rule is to automate your savings. Similar to how you can set cruise control on a car, you can set up an auto-withdrawal to pull money from your checking account into a savings or other investment account. A few minutes setting this up can save you the struggle of setting aside 20% manually each month.
|Monthly After-Tax Income||80% Expenses||20% Savings|
Budgeting Your Way to Becoming a Millionaire
A major advantage to percentage-based budgeting is the emphasis placed on personal savings. Each strategy listed here allocates 20%-30% of personal savings each month.
If your monthly after-tax income was $3,000, and you saved $600 every month (20% of $3,000), you’d be saving $7,200 each year. If you were to invest that amount each year for 5 years in something with a 7% estimated annual rate of return, you’d have contributed $36,100 with an additional $8,344 in interest. In 10 years, you’d have $106,639 saved, and 35 years $1,066,045!
As you increase your savings rate over time, you’ll grow your savings exponentially due to the magic of compound interest. If you stay disciplined and contribute each month, you can begin setting yourself up for future financial success.
The Bottom Line
The climb up your financial mountain may seem daunting, but you’re not alone. A percentage-based budgeting strategy can be a constant guidepost along your journey. The important part is to begin, wherever you are. And if one strategy isn’t right for you, change it! The beautiful nature of percentage-based budgeting is that it allows you to go as you grow. You can start out with a 1% savings rate and grow it to 30% or beyond. You can even learn to customize your own approach to your personal finances. The budget strategies here are a starting point, not your final destination.
Stay disciplined and you’ll be on your way up your financial mountain in no time.
Climb on, FinBase.