One of the best ways to be successful with your money is to know where your money goes each month. Many people fall into financial trouble but don’t understand why. This is because they miss the basic financial management principle of budgeting.
Making a budget and tracking your spending can feel a bit like having strict parents. And it seems like your budget starts by telling you what to do. Then your spend-tracking sheet comes along to shame you or punish you when you don’t follow your budget. However, this perception of budgeting and tracking spending is misguided.
Creating a budget actually gives you freedom. A budget gives you the freedom to tailor your current spending practices as you see fit. It helps you adjust them in a way that ensures you are managing your money in line with your financial goals.
Monthly Budget Percentages by Category
Here are some guidelines that will help you to make your budget. Your budgeting percentages may vary from these suggestions due to the size of your family. The area you live in (cost of living varies from city to city) and what your financial goals are will have an impact too. Remember that it’s important to tailor your budget to fit you/your family’s personal needs and lifestyle.
|Category||% of Take-Home Pay|
|Giving||10 – 15%|
|Medical||5 – 10%|
|Housing||25 – 35%|
|Transportation||10 – 15%|
|Savings||10 – 15%|
|Food||10 – 15%|
|Utilities||5 – 10%|
|Insurance||10 – 20%|
|Recreation||5 – 10%|
|Clothing||2 – 5%|
|Personal||5 – 10%|
Why Following These Percentages Can Help
My family and I used to be saddled with over $60,000 in consumer debt. In our particular case, it was a simple lack of budgeting and not tracking spending that got us into that debt. We couldn’t figure out why we were in the hole each month. After all, we weren’t making large purchases. We were only buying small daily items.
The problem was that I wasn’t tracking our spending. Instead, I made an estimated budget each month and assumed we followed the numbers. When we decided to go back and add up our yearly spending in December of 2012, we were floored at what we found.
We assumed we were spending $600 a month or so on groceries. In reality, we were spending about $900 a month. We assumed we were spending about $100 a month on eating out.
In reality, were spending $275 a month. So a lack of budgeting and not tracking our spending had a huge impact on our financial situation. And it wasn’t a good one. The reality of it hit us hard. And because of that mistake, we’re still working to pay off the debt we accrued from not budgeting.
Budget and Track Spending as a Team
It’s important to use a budget and track spending together as a team. As you plan your monthly spending, don’t just use one or the other. If you create a budget without tracking spending, you’ll have no idea if you’re staying within the budget you’ve allotted for each category.
This can be especially challenging in certain spending areas. Groceries, entertainment and restaurant expenses are the three areas we struggled with the most.
What if you track your spending without first setting a dollar amount goal for each category? If so, you can easily spend more than you would like to in one or several categories. With a pre-set budget, you have a number to aim for that will help ensure you’re making efforts to control spending.
With controlled spending, you have more money to put toward your financial goals. It will work for you whether those goals are saving money for a house, paying off debt or working toward financial freedom.
Working on and living within a budget and tracking your spending may seem restrictive at first. However, I’d be willing to bet that the excitement over the savings you gain by having a plan for your money will set in fast. And it will far outweigh any pre-budget sense of restriction you might feel before you start using these powerful financial tools. So are you ready to give it a try?
Feel free to tweak the percentages we suggest to fit your particular spending goals. Just make sure that your percentages add up to 100% each month. A “zero-based” budget” ensures that every dollar has a “job” and that no money is left unaccounted for. Why? Because unaccounted money often means wasted money.
Spend Tracking is Vital, but Consider Using Cash Too
Another personal finance tool that may help you stick to your budget is the cash envelope system. Money is easy to waste, especially in today’s plastic driven, app-driven virtual banking society. When using credit or debit cards, you don’t actually see the money leave your hand as you make your purchase. So it’s very easy to forget that it’s the same money that you work so hard for each week. Instead, it’s only a line on your digital bank statement.
Today’s banking technology means that it’s a whole lot easier to spend a little bit of money each day. However, at the end of the month that “little bit” adds up to a whole lot of your paycheck. This reality leaves a large percentage of people wondering where their money disappears to each month. In the process, they incorrectly assume that they simply don’t earn enough to “make it.”
Try using a cash envelope system for fluid expenses. Use it for groceries, entertainment, meals out and other flexible spending categories. This will help you ensure you’re not spending over the allotted amount in your budget. Why? Because you commit to only using the money in the envelope for those expenses. Once the money is gone, you’re finished spending in that category for the month.
Don’t Let Your Money Disappear
One way to avoid the pitfalls of “disappearing” money is to set new monthly budget percentages each month. Do this for each category of your spending. Different months often bring different budgeting needs. For instance, you might have a special trip to the opera one month that you wouldn’t normally take.
Work to determine at the start of each month how much money you’ll spend in each spending category. After that, track your spending to be sure you stick to your budget. By doing so, you stand a much better chance of ensuring that your earnings go where you truly want them to go each month.
You also help eliminate the amount of money that “disappears” into the black hole of spending. As you get accustomed to using percentages to plan your budget, know that your numbers might change. You’ll likely find yourself tweaking your percentage amounts to fit your particular monetary needs and goals.
Tweak Your Budget on a Regular Basis
Keep tweaking your budget each month until you find a system that works well for you or your family. Doing so is a vital part of a successful financial plan. No person/family is the same as another. This means your budget will not work well if you base it on someone else’s budgeting plan. Also, it’s probable that your spending in each category may change from month to month depending on what bills are due.
For example, car tabs are only due one time during the year. This means you’ll likely have a month when you spend more on auto maintenance to cover auto tab costs. Dave Ramsey recommends calculating your annual costs in certain fluid budget categories.
Do this for categories such as auto maintenance, and divide that number by twelve. Then save the necessary amount of cash each month. Save the money either in your cash envelope for that category or in a separate savings account. That way, when the bigger expense months arrive, you’ve already got the cash set aside.
It doesn’t matter which method you choose but choose something. It’s vital to budgeting success to analyze your spending and budgeting categories each month. You’ll want to see if you need to make changes that will better suit your financial situation. Learning to use budget percentages to maximize the success of your financial budget is an important step. It’s a vital part of successful money management and wealth-building. Use this powerful tool to help ensure that you do indeed reach your financial dreams and goals.
Do you budget using percentage guidelines? What’s your favorite budgeting tip?