Creating a Personal Budget By Income Ratio

So now that I’m temporarily out of work, I’ve become much more acute to every cent that I have and making sure I allocate a certain portion of my money to each of my needs so that it lasts me as long as possible. I wanted to share with you guys the appropriate percentage of your income that you are supposed to spend on survival needs (according to my findings). Obviously it’s not a perfect system and you’ll have to adjust it to what suits you best, but it good to have a general guideline of your budget. So out of your net monthly income, after taxes, you should try to spend close to:

• 30% on Housing
• 10% on Utilities
• 15% on Food
• 15% on Transportation
• 10% on Debt
• 5% on Savings
• 5% on Investments/Pension
• 5% on Clothing
• 3% on Charity
• 2% on Miscellaneous Items
100% Total

Housing – 30%
One of the most important things in your life will be the place you live in. You will always need a roof over your head, but try not to make it more than 30% of your income after taxes. This includes your rent or mortgage. You would also want to include any house insurance or renters insurance here. If you are renting and your rent includes all your utilities, you can spend 40% of your income on this since both of these will be lumped into one category. If you want to save extra money in this category you could try renting a cheaper place or finding a place where the utilities are included.

Utilities – 10%

So now that you have a place you need to think about utilities (unless they are already included – read above). Utilities shouldn’t be more than 10% of your net income. This includes all your heat, water, sewer, electricity, cable, internet, phone, and if you own a condo, your condo fees. 10% isn’t that much of your total net income but if you end up spending more than 10% on your utilities, the rest of your budget could be compromised as a result.

Food – 15%

You should be able to cover your food expenditures with 15% of your net income. If you make more money, this percentage can usually be smaller. If you make less money, you can usually save some money in this area buy buying no name foods at the grocery store and not going out to dinner as much. The food section of this budget includes any grocery shopping, trips to the fast food store and going out to restaurants. If you want to save more money in this section, you can buy little snacks with spare change that you have from your other sections to really make your dollars stretch as far as they can.

Transportation – 15%

You have to make room in your budget for transportation and it can vary anywhere from 3% (if you take city transit on a regular basis) to 20% for a car. Try to stick with a mode of transportation that is 15% of your net income or less (remember, the less money you save in these sections, the more you have left over for other things). In the transportation section of your budget you want to include any bus fare, cab fare, gas for your car, regular maintenance for your car (oil changes etc), and car insurance.

Debt – 10%

The average American has some form of debt (not including their mortgage), such as credit cards, line of credit, school loans etc. Try to put in about 10% of your take home pay check to your debt payments, but of course you can change this to suit your needs. If you have a lot of debt, maybe you should consider putting in more money to get rid of it faster, going as high as even 50% of your net income every month. If you only have a little bit of debt (one small credit card) or no debt at all, you can alter the percentage lower and have more money to put in another section of your budget. If just the minimum payments on your debt are more than 10% of your net income, perhaps you should consider getting another source of income in order to get it down, or look into consolidation, or even bankruptcy.

Savings – 5%

Try to put away 5% of your income into a savings account for a rainy day. You never know how long you will have your job for, or if something unexpected comes up and it’s always better to have a little bit of extra money to fall back on if you need it. It’s always good to have a little bit of extra money in your savings account in case your car breaks down or your roof leaks or anything else comes up. If you are planning to save for another purpose such as a nice vacation, down payment or even a wedding, you might want to consider putting in more than 5% of your net income to reach your goal faster. Either way this is a very important section of the budget that is often forgotten about, so be sure to include it in your financial plans to really help you get the most out of your money.

Investments/Pensions – 5%

Roughly 5% of your net income should be going towards some sort of investments or pension plan. This includes anything that you contribute to on a monthly basis such as an RRSP, stocks, bonds, mutual funds, even physical commodities such as precious metals, oil, gas etc. This is where you will put in the bulk of your retirement money and your extra investments so you can actually retire one day. It’s better to start thinking about this as early as possible so you can retire at 65 or even earlier, so be sure to include this section in your personal budget ratios.

Clothing – 5%

I’ve given 5% of your net income to clothing although this can also be cut shorter to suit your needs better. There’s nothing wrong with wearing your old clothes if you don’t have money to buy new ones. There are many places you can buy your clothing for cheaper and save money if you need to so try to shop around for the best deal to save you more money in the long run. Obviously you’re going to have to make a few purchases such as warm boots for the winter, but for the most part, new clothing isn’t that necessary on a regular basis and you can save some extra money in this section if you need to.

Charity – 3%

One of the most important things when you have so much is giving back. If you have a steady stream of income, you should try to give back at least 3% of your income every month if not more. Try sponsoring a child or giving to charity on a monthly basis. You can set it up so it’ll come out of your account automatically and you’ll feel good because you’re giving back to your community and helping those who need help. Even if you don’t have much to give, every little bit helps so include this into your budget ratio worksheet.

Miscellaneous – 2%

We all want a little bit of extra entertainment or a nice night out on the town so 2% of your monthly income should go to enjoying yourself and other miscellaneous items. If you want to hit up the spa or get your hair dyed nicely, that will all come from this section of the budget. Even if you are trying to be frugal, having some fun is important and 2% isn’t that much of your income so don’t worry and treat yourself.

Children – 10%

Now all of the above sections all add up to 100% but as many of us know, children change everything. Instead of trying to separate money especially just for your child, it’s easier to just incorporate them into your regular budget, but sometimes they need “extra stuff,” and I’ve put a rough estimate of 10% for this. Obviously, you would need to tinker around with your current budget in order to fit in this 10%. In this 10% you should include things like school fees, extracurricular activities, and RESP for their future education, or even throwing birthday parties for them. It’s best to fit your kids into your current budget, but it’s also a good idea to try to set aside 10% of your net income for them for those other child expenses (there can be a lot of them so preparing even a little bit would help you out in the long run).

In conclusion, try your best to follow the budget ratio guidelines here, but remember they are just guidelines. You may have to alter some of the numbers in order for it to work for your specific needs. If you want to spend more on your home and you don’t have debt, there’s nothing wrong with going up to 50% instead of 30%. If you only have to pay $80 a month for a bus card and want to put more into your investments instead, that’s fine; it’s all totally up to you. Just remember that whatever you take out of one category, you will have to make up for in another category.

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