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How to use budget percentages to meet your financial goals

Supposing your budget is off-balance. How do you then figure out which expenses to knock- off the list? This approach will help.

Maintaining a family budget gives you control over your money. It highlights if you are living beyond your means. 

Supposing your budget is off-balance. How do you then figure out which expenses to knock- off the list?

Are you spending more on entertainment than warranted? Do you need to rein in your food expenses?

To answer these questions, you need to get into the details. 

Why budget percentages?

You have to convert absolute expenses into percentages (of overall budget). 

You need to look at your expenses as a pie and each expense as its slice. By comparing share of each expense vis-à-vis its recommended budget percentages, you will know whether you are crossing the limit. 

At first, it might seem a daunting task to maintain budget percentages. But once you start seeing the financial gains, its advantages will far outweigh the initial sense of strait-jacketing. 

So, are you game?


Pull up your credit card and bank statements of the last one year. Enlist all expenses into the following categories (see above graph). For purpose of calculation, consider take-home salary.

Housing
It include house-related expenses like rent/house EMIs, maintenance bill, property taxes and repairs. Limit these expenses up to 30 percent of overall budget. 

Utilities
It includes expenditure on electricity, gas, internet, cable and cell phone. Try to limit it to five percent of budget. 

Food
It includes spending on groceries and eat-outs. It is advisable to keep the food bill up to 10 percent of budget. Pack your food and search for bargains while buying groceries to chop-off the excesses.

Transportation 
Public transport, fuel and maintenance for your car is part of this expense head. Car EMIs, if any, as well as auto insurance is also part of it. Limit it to 10 percent of the budget. 

Medical expense and insurance
Your occasional visits to doctor for check-up or treatment or payment of insurance – life or medical– should ideally be not more than five percent of budget. 

Savings
You could save for retirement, to pad-up your emergency fund or to sponsor down payment for big purchases like that of a house. To this, add loans of various kinds – be it personal or credit loans - but exclude car and home loans. 

Save at least 20 percent, and preferably 30% if you want to finance a comfortable retirement, of your income. Saving should be at least 10 percent and gradually increased with repayment of debt. 

Recreation 
This is your spending on entertainment and other lifestyle expenses like movie tickets and leisure travel. You might be tempted to fully cut back on these expenses. However, it will not be realistic. It is advisable to limit it to 10 percent of budget.

Personal spending
Spending on clothes, shoes and personal care will come under this head. The recommended limit is up to five percent of budget. Add your lifestyle credit card debt to this.

There are two ways to do it. One, by cutting on the ‘excesses’. And/or by transferring the savings made in one category towards another. Nobody is going to haul you for not sticking to these recommended budget percentages. At best, treat it as a broad guideline. 
Charity
Contribution towards charitable organisations or other charitable activity can be about five percent of your budget. 

Streamlining your budget 
There are two ways to do it. One, by cutting on the ‘excesses’. And/or by transferring the savings made in one category towards another. Nobody is going to haul you for not sticking to these recommended budget percentages. At best, treat it as a broad guideline. 

Ideally, work out an individualised budget percentage that works for you. For instance, families with more family members are bound to have more expenditure on food. In such cases, they should spend more than the usual.

However, in this entire shuffle, ensure your savings are not compromised. Save at least 10 percent of your budget for retirement and other goals. And scale it up as your income improves. It will fast track your progress towards these financial goals.  

Takeaway
Budgeting percentages gives a holistic picture of your family budget. By following the recommended guidelines, you can save enough for fulfilling your important financial goals.

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