While many put off making a budget as they find it harder to stick to one, a lesson that’s most often learnt eventually is that budgets aren't one-size-fits-all. In other words, the style of budgeting that helps you get your personal finances on track might not work for someone else.
One very simple and easy-to-follow budgeting style is percentage-based budgeting. But before we get into who a percentage-based budget is best suited for, let's take a look at how this type of budget works.
Simply put, this is how percentage-based budgets work. You earn a certain amount of money each month. You set percentage targets for how to divide that money up toward your current expenses, savings, debt repayments, non-essentials or anything fun, and any other category that's vital to you.
What does a percentage-based budget look like?
One very common example of percentage-based budgeting is the 60/20/20 budget, in which 60 per cent of your income is devoted to necessary expenses, 20 per cent is devoted to savings and the remaining 20 per cent can be spent on non-essentials.
However, that's just one example though. “You can break up your income in any way that works for you. The key is to prioritise your expenses (including debt repayment, if that's an issue for you) while still leaving something for yourself,” explained Terence Morgan, a New Zealand-based financial planner.
• Dh1,000 for rent
• Dh500 for groceries
• Dh300 for utilities
• Dh200 for Internet and cell phone service
• Dh300 for miscellaneous fun activities
• Dh200 for debt repayment
• Dh500 for savings
Altogether, that's Dh3,000 that's going towards bills and savings combined each month. That represents 60 per cent of your income. The question is, what are you doing with the other 40 per cent?
In order to find out whether this type of budget is right for you, here are three signs that percentage-based budgeting might just suit your financial needs.
1. You earn a variable income
If you don't know how much money is coming to you each month, how can you decide ahead of time how much to put toward various financial goals and obligations?
So for those who earn a variable income, the answer might just be a percentage-based budget. If you budget by percentages instead of fixed amounts, you help ensure that money always goes toward some long-term financial goals, rather than disappearing to discretionary purchases.
“The biggest plus, though, is that if you set aside a percentage for fun purchases, you'll always get to enjoy some of your money. And, the more you earn, the more you'll get to enjoy. How's that for motivation?” Morgan further noted.
“Percentage-based budgets are for people who like rules. You don't have to think about it. You don't have to decide. You just divide your money out the same way, each and every month. For some people, that act, in itself, is very satisfying.”
2. You have a lot of financial goals and obligations
It's easy to just divide money up and put it toward expenses and savings and then splurge on the rest, but when finances get more complex, it’s not as easy.
There are credit card debts, loans, mortgages and retirement funds to think about for many. As it turns out, the more complicated your financial life, the better a percentage-based budget might work for you.
So, let's say you have devoted 20 per cent of your income to savings. You can then subdivide this to cover retirement savings and an emergency fund, while also saving for a vacation. You can also adjust how much money is going into each account based on your needs.
“As you approach retirement, for example, you might want to make your retirement account a bigger priority. The great thing about using percentages is that they allow you to be flexible while still holding you accountable,” explained Dubai-based wealth advisor Mohammad Shaan.
3. You want to live within your means
When it comes to managing personal finance, percentages are important, and percentage-based budgets don't just help to adjust your spending and saving, they also help you analyse it.
“After all, if you go to setup a percentage-based budget and discover that your expenses are equal to or exceed your income, you'll know that either your income isn't great enough to meet your needs, or that you're living way beyond your means,” Shaan added.
“Either way, setting up a lifestyle that allows you to devote a percentage to savings each and every month is essential to long-term financial stability.”
Creating a budget based on percentages will help you see whether you need to practice more conscious spending, live on less, or earn more.
Making a budget based on percentages ensures that you're giving every dirham of your income a job. That's important if you have small or large financial goals that you're working on and it feels as though you're not making progress towards them.
“If you’re a minimalist, you most often won’t feel the need to spend money on a lot of new things, and overall, the things they enjoy don't tend to cost money. Saving money tends to come pretty easily to people like this,” explained Shaan.
On the other hand, there are also those who splurge. “They are most invested in going out for dinner often, taking vacations overseas, frequently going to concerts, shopping, and doing whatever else makes them feel they are enjoying their money in the right here and now.
“Unlike the minimalists, they tend to see their money as a way to enjoy life, and for them, saving money can often take a backseat. If this sounds like you, consider a percentage-based budget,” Shaan added, which is an evaluation Morgan also agrees on.
One primary reason why these experts recommend this is that you'll get to spend a percentage of your income on whatever makes you happy every single month.
“Maybe you're already doing that anyway. The only difference is, with a percentage-based budget, you get to do it guilt free,” added Morgan.