It is not uncommon to feel restricted when budgeting, especially if you are controlling your spending across multiple categories. However, there is a simpler solution called proportional budgeting, where you divide your monthly income into categories based on a percentage:
- Allocate a percentage to your needs – things that are essential
- Allocate a percentage to your wants – things you choose to buy, but can survive without
- Allocate the remainder to savings – the amount you put aside for your future
A popular example, using the Harvard Economist’s, Elizabeth Warren’s 50-30-20 rule of thumb.
She proposes the following allocation of your after-tax income:
- Limit your needs to 50% of your income
- This should include groceries, housing, utilities and transport.
- This amount should be no more than 50% of your total after-tax income.
- Limit your wants to 30% of your income
- These items should include things you want, such as a beautiful shoe, DSTV, your gym contract and even your home internet.
- It should be notes that any discretionary spending that you could forego with only minor inconvenience is a want.
- Spend at least 20% of your income on savings and debt repayments
- Spend at least 20% of your after-tax income repaying debts and saving money in your emergency fund or for retirement.
- If you have credit or retail cards, the minimum payment is a “need” which counts towards the 50%.
- Anything over that is an additional debt repayment, which qualifies towards this 20%.
- The same logic applies if you have a bond or a vehicle loan, the minimum payment is a “need” and extra payments count toward your “savings and debt repayment.”
The 50-30-20 Rule of Thumb makes total sense and it might work for you. However, a simpler method is to follow the 80-20 rule. This is spend at least 20% of your income on savings and debt repayments. The point is, that if you can control 80-20, why not try 70-30? This is when you will realize that budgeting is not about restricting yourself. Budgeting is the art of aligning your spending with your values.
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