Budget Strategies - Percentage Budgeting Anyone?

DannyB

Greetings fellow Simplifiers!

If you've got some time to kill, here is a long post about using percentages as a budget strategy.

Sometime last year and into the first part of this year I experimented with using a "Fixed & Flexible" strategy to organize my Spending Plan. I still see the fixed and flexible aspect in the Spending Plan, but in the end the experiment was a bust for me. I still think it is a viable strategy for budget planning but for me it turned out to be a very good analytical tool for assessing my spending and making decisions about where to spend what. But having gone through the exercise of looking at my spending through this lens, I have reverted back to my original budget strategy which is, in essence, a percentage budgeting strategy.

The two most common percentage breakdowns are the "simple" 50/30/20 breakdown: 50% needs, 30% wants, 20% savings/debt paydown. The second percentage strategy is more "complex" using a more detailed structure for personal finances.

Here is a typical breakdown:

• Housing: 25-35%
  
• Insurance (including health, medical, auto, and life): 10-20%
  
• Food: 10-15%
• Transportation: 10-15%
  
• Utilities: 5-10%
  
• Savings: 10-15%
  
• Fun (entertainment and recreation): 5-10%
  
• Clothing: 5%
  
• Personal: 5-10%
• Charitable Giving 5-10%

This second one is more-or-less the strategy I started with and returned to after my experiment with Fixed and Flexible.

How one arranges and sorts out their expenses can very. For instance, I don't have an "Insurance" category. Instead I include insurance expenses under the category the insurance covers: Home owners insurance is included in my Housing category; Auto insurance is included in my Transportation category. This is mostly out of habit rooted in NOT wanting to have to separate out the insurance portion of my monthly mortgage payment which included payments to an escrow account for property taxes and insurance. Even though I no longer have a mortgage and accompanying escrow account I'm sticking with my old habit. What can I say, I'm a lazy SO… guy.

My percentages look like this:

• Housing: 13%
• Charitable Giving: 7.5%
• Food & Household: 13%
• Auto/Transport: 13%
• Quality of Life: 11.56%
• Savings: 7%
• Miscellaneous: 15%
• Travel: 6.81%
• Health: 13.62%

I know my percentages are a bit precise in a few instances. This has to do with certain set amounts for those categories and how they fit into the total. Also, these percentages are based on a set amount of income per month and an assessment of our actual spending over a number of years.

My savings percentage is actually higher than the 7% since my Auto/Transport includes savings for auto replacement down the road and Housing includes savings for replacement of furniture, appliances, significant repairs, etc. Placing these savings under the corresponding categories just makes more sense in the convoluted way my mind works (or doesn't work as the case may be).

Here is my YTD spending all categories:

Yes indeed, my Travel category which should be just under 7% of my spending is way over! But, never fear - all of that spending came out of a savings account we set up a couple of years ago in anticipation of doing some globe trotting after we were both retired. So if I deduct that portion from this chart I get this:

• Housing: 19% compared to 13% planned
• Food & Household: 17% compared to 13% planned
• Auto & Transport: 16% compared to 13% planned
• Miscellaneous: 13% compared to 15% planned
• Health: 13% compared to 13.62% planned
• Quality of Life: 9% compared to 11.56% planned
• Charitable Giving: 8% compared to 7.5% planned.

The "Savings" category is not included in this report since these are transfers and by default are ignored in reports and the spending plan. I haven't thought through what impact or how this report is skewed by the use of Saving Goals to cover non-monthly expenses, but they should all be included here since I mark those expenses to be ignored in the Spending Plan but not in reports. Auto & Transport includes work done on my daughter's auto that I paid for but she reimbursed me for. I suppose I could mark this expense to be excluded from both the Spending Plan and Reports and that would bring this category into alignment with the planned percentage (12% instead of 16%).

We had to replace or fridge which is inflating our Housing percentage and that should come into alignment through the second half of this year.

I've had to adjust up our Food & Household category in most months so far this year. I have increased the amount for this category in Planned Spending taking funds from underspent categories. I need to make the percentage adjustments in my budget to reflect this reality. I can do so without inflating our current budget but if your budget is up against the numbers month to month in all categories this would warrant cutbacks in spending somewhere.

So that is where I am today with my budgeting strategy and how that works out in the real world. Simplifi has helped my visualize, plan and track my cashflow, giving me confidence that we are on the right track… which just happens to be my answer to the profile question about my primary money goal. 😎

Coach Natalie

Thanks for sharing, @DannyB! 😀

-Coach Natalie

Flopbot

@DannyB , this is awesome! Thank you for letting the community in on your learning process with Simplifi…it's fascinating!

Congrats on being pretty close to your estimates despite going through several major life transitions this year.

One question about Insurance, since Simplifi doesn't allow splits yet with Recurring Series, how do you handle one Insurance payment being split out to various categories (Housing, Auto, RV, Luxury Yurt, etc.)? Is each insurance bill separated out on different bills/policies/providers, or do you split it out after it clears the bank? I like the idea of including Auto Insurance with my "Auto & Transportation" category, but then that would throw off my "Housing & Home Maintenance" category.

DannyB

@Flopbot

At first I thought this would be an easy response regarding the insurance bills… but now that I'm actually responding I'm not quite so sure… anyway, I'll try.

Since subcategory expenses make up the total of each category there is no need to split them out other than placing the subcategory under whatever top category desired. My point above is that I don't have a separate top category for Insurance that I list all my various policies under and instead include them in the category they cover.

The only insurance premium that I have to "split out" is my Medicare Part B premium that is deducted from my SSA benefit every month and as you point out I have to make this split manually every time. The way I incorporate this premium into my spending plan is via a Planned Spending Category set to the amount of the premium since I can't include it as a recurring bill.

Otherwise, all our insurance premiums are paid as recurring bills in the Spending Plan that are sub-categories of the appropriate top category. My home policy is a subcategory of Housing, My auto policies are a subcategory of Auto & Transport. My medical insurance premiums are a subcategory of Health.

My home owner policy and the various health insurance premiums are paid monthly and show up in the Bills section as monthly recurring bills.

I pay my auto premium annually and that expense is covered by money I set aside through monthly contributions to a Savings Goal.

Not sure that this answers your question. Let me know.