How much of your budget should be taken up by day to day expenses and how much should be saved? are some of the key questions that many households grapple with.
We have a new and unique way that you should look at the personal budget.
How much of your monthly income should be allocated to recurring expenditure such as groceries, school fees, eating out, medicines etc As a rule of thumb I suggest that you should limit recurring expenditure to 60% of income if you are not to incur more debt. Try to save at least 40% of your income – this will ensure that a small reserve can be created to manage any unexpected future expenses and also to make investments.
Saving and investments
Target to save at least 40% of your income this will include, payments to an IRA or 401k, long term savings account, mortgage payments, irregular expenses i.e. vacation expenses, entertainment expenses. Households that can consistently save at least 40% of monthly income have a greater likelihood of staying out of debt over the long run.
Also read this article about the various personal budget percentages
Is a effective way of identifying where you spend a lot of or most of the household income. Understanding what percentage of income is being utilised will give you an idea of which expenses should take more attention.
Take a look at this online tool from Kiplinger that will help you understand which expenses should be controlled.
Understand the budget
Personal budget percentages is a good way to understand budgeting as it gives you a good way to relate to the numbers and detect when something is off. Accountants use variances in percentages to discover frauds and you can use the same theory to check if you have been erroneously overcharged.
Percentage analysis ensures that the maximum possible is being saved and that you are on target to create an emergency reserve or investment fund.
What if you have a irregular income or self employed what are the options that will help you budget without seriously overspending – there are few options that can help you- aggregate approximate annual income and then average it to arrive at a monthly figure.
But using a holding account – put all the income into one account but draw out only a fixed income from the account. This method is usually used by students who receive funds at the beginning of the year for the full year or term.
The third method is using two budget one for the good months another for bad months this helps to keep to the correct income level in any given situation.