Tired of Traditional Budgets? Try the Proportional Approach

By Mike Peterson
In August 21, 2014

Budgeting is the foundation of healthy personal finances. It helps you set and achieve goals and identify finance habits that need work. If you don’t have enough money coming in, or if too much is going out, budgeting is the all-important red flag that can get you in motion in time to avoid an all-out disaster.

 

But while most people agree budgets are important in theory, it can be hard to get the momentum going to create one and stick with it. Even those who are willing to budget find themselves frustrated sometimes with the detailed categories and minutia that can come with the budgeting process.

 

In these situations, a proportional budget could help.

 

What is Proportional Budgeting?

 

Instead of budgeting for specifics like housing, car maintenance and entertainment, proportional budgeting calls for three basic categories: needs, wants, and savings.

 

So a 50/20/30 budget would mean you’re allocating 50 percent of your income to needs, 20 percent to wants and 30 percent to savings.

 

If your income is limited or your basic expenses are high, your percentage breakdown might be 70/10/20.

 

If you’re preparing for emergencies and retirement is your greatest financial goal, then 40/10/50 might be the route for you.

 

The beauty of this approach is you can set the percentages based on your needs and priorities. If you want to focus on one of the three areas more than the others, the budget will remind you to curb your spending in the other two categories.

 

Here’s a closer look at proportional budgeting and how to make it work for you.

 

Getting started

 

As you create this budget, remember that you should be making your calculations with your after-tax income. In other words, use the money left over after income tax, Social Security, Medicare and disability taxes are deducted.

 

Other deductions, including health insurance premiums, should be added back to your net pay for this process.

 

Needs Vs. Wants

 

Proportional budgeting won’t work unless you’re willing to take an honest look at your expenses and separate the needs from the wants.

 

There can be gray areas here. Yes, we all need food to survive and remain healthy. We don’t need to eat out, though, order pizza every weekend, or treat ourselves to goodies we can do without at the grocery store. The same dynamic applies to housing and transportation. We need those things, but it’s easy to make splurges in these areas and justify them as needs.

 

Essentially, needs are the essentials we must have to survive and function in society: food, shelter, clothing, utilities, transportation, personal care, child care, telephone, insurance, medical expenses and loan/credit card payments.

 

Figure out what’s required to cover those expenses and the percentage of income it represents.

 

Setting Your Priorities

 

Once you’ve allocated the percentage that must go toward basic necessities, you can set your priorities in the wants and savings categories.

 

Your wants could include gifts, entertainment, clothes, eating out, and other expenses.

 

The money that goes into savings should include your emergency fund, money you’re putting away for major goals/purchases, and your retirement fund.

 

Some advisors recommend putting minimum loan and credit card payments in the needs category, and additional efforts to work down your debt in the savings category. Whether you’re saving, paying off debt or both, this category is important; don’t neglect it.

 

If you find your percentages are especially heavy in one area, possibly 80 percent or higher in needs, it might take some time to work down debt, bring in more income or re-assess the needs and wants again to get a more balanced ratio.

 

A healthy balance to aim for is 50-60 percent needs, 20-30 percent wants, and 20 percent savings. This budget should work well at most income levels, depending on your cost of living and income stability.

 

Proportional budgeting isn’t for everyone, but it can be a helpful tool. Even if you go with proportional budgeting temporarily, establishing one is a great exercise in goal setting and money management.

 

Happy (proportional) budgeting!

Mike Peterson

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.