If you thought you left behind percentages when you graduated from college, think again. Percentages are an important feature of a successful budget. It’s important you know the right ones, so you can balance your household budget with ease. Keep reading to learn why.
Think of your budget as a pie chart
Each category of spending gets a slice of the pie, from rent to utilities and entertainment to takeout. Few categories get the same-sized slice, making it difficult to cut your financial pie chart into simple quarters, eighths, or sixteenths. When you need to divvy up your pie into unequal pieces, percentages can help you maintain order. The tough question is: what percentage of your paycheck should go towards each category of spending?
It’s an excellent question that has a different answer for each person
Individual budgets are influenced by a lot of variables that affect what you can afford to spend. Take, for example, the cost of living in New York City compared to Columbus, Ohio. Rent and groceries cost more in NYC, forcing those who live in the Empire State to spend more of their financial pie on these categories than those who live in less expensiveareas of the US.
Though they differ from person to person, there are some general rules accepted by financial advisors. They include the 50-30-20 Rule, the 60-20-20 Rule, and the 80-20 Rule. With each denoting a different percentage breakdown of your income, these rules can help guide you in choosing the right breakdown for your budget.
The 50-30-20 Rule
This method suggests spending 50 percent of your net income on the necessities. The necessities are things like housing costs, utilities, groceries, and insurance payments. The next 30 percent of your income should go towards future financial goals, like paying off car leases and payday loans or saving for your retirement. Reserve the final 20 percent for fun things, like going out for dinner or catching Infinity Wars in theaters.
Some financial experts believe the previous breakdown is unrealistic for today’s economic situation. At the same time many people are underemployed or earning less, a combination of inflation and rising costs of living makes it to more expensive to meet basic needs. The combined total of rent, utilities, and other necessities often exceeds 50 percent of an individual’s income, even when they live frugally. This strategy allows an additional 10 percent to go towards your necessities, to make a total of 60 percent of your net income. Only 20 percent goes towards savings and debt reduction, while the fun category remains unchanged.
This method is great for anyone who hates math or struggles to track expenses. The breakdown is simple. Only 20 percent of your net income should go towards your savings, retirement, and debt reduction. The remaining 80 percent covers everything else — from rent and insurance to clothing and entertainment.
While it’s easier to put into practice than the other rules, it’s also easier to botch. When you don’t track all your expenses carefully, you can accidentally overspend in one area of your budget. If you do this often enough, you can end up pulling money out of your savings to pay for other items. Once you drain your nest egg, you’re left unprepared when emergency strikes. Like, let’s say, when your insurance goes up after a fender bender, or when your dog needs emergency antibiotics.
Finding outside financial support is a responsible way to cover these crises, but not all cash loans are a responsible solution. Since your finances are already strained, it’s hard to repay traditionalshortterm loans with immediate repayments. Luckily, you can find a cash advance lender like MoneyKey that offers installment loans with more forgivable repayment terms. Visit Moneykey.com/installment-loans-online.php to see how these terms differ from conventional shortterm loans. When you can find a cashflow solution that works within your means, you’ll find it easier to recover from your budget mistakes.
Each method has its flaws. That’s why it’s critical you investigate them all, so you know which one works for your abilities. Maybe you prefer the flexibility the 80-20 Rule affords, or perhaps you need the rigid structure of the 50-30-20 Rule. It doesn’t matter which one you choose as long as the percentages reflect your lifestyle. When you do, you’ll find it easier to spend responsibly and save properly.