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There are many thoughts on how to spend your money, how much to save, what qualifies as a mandatory vs. discretionary expenses…the list can go on and on.
When using percentage based budgeting, you are allocating a percentage of a budget for this category or that category.
Also, did you know it is one of many budgeting methods? All of the Best Methods of Budgeting You Need to Know.
The most common budgeting method is the 50/20/30 budget rule. But, it is it outdated and doesn't align with the bigger picture in today's society. You need an updated budget formula to work in today's society.
At Money Bliss, we prefer to base percentage based budgeting off of the Cents Plan Formula. It is a guide to help ease your budgeting decisions.
The Cents Plan Formula is developed to be simple, easy, and flexible.
Understand how to budget your money with percentages. Ultimately, you decide Where Cents Parallel Vision.
The Cents Plan Formula makes up 5 categories:
- Basic Expenses
- Fun Spending
So, we are going to take the 50/20/30 budget rule one step further and create the 20-50-10-20-0 budget rule.
We'll explain more and why it is a better budget formula.
Why the Traditional 50/20/30 Budget Rule is Wrong
First of all, it is outdated.
There is no flexibility to the rule.
It justifies lifestyle creep.
It forces materialism and forces extra wants.
#1 – For instance, if you were saving for more than just retirement, then you savings percentage must be higher than 20% to accomplish whatever you are saving towards. That means debt must be 0% and you have worked on lowering your basic expenses.
#2 – Another example, your income increased by 25%. With the 50/20/30 budget rule, that means your basic expenses should increase by 25% as well. But, does it necessarily? If you were able to live on the previous amount, then why should you upgrade and fall victim to lifestyle creep.
#3 – You are struggling with your debt. Your current debt payments take up 12% of your income. So, that debt percentage needs to be taken from another budget formula percentage. Debt isn't a basic expense as many people justify in the 50-20-30 budget rule.
Key Aspect to Budgeting
The purpose of a budget is to help you reach your money goals and life dreams.
When starting out on your money journey, I highly recommend to read the Money Bliss Steps for Financial Freedom.
Creating a budget is the first step to becoming organized as you work through the steps for financial freedom.
Remember, the Cents Plan Formula is meant to be flexible.
As you work through the Money Bliss Steps, you will find times there is less or more money for each category. That is completely normal. Plus it helps with long-term success with a budget.
- How to Organize your Personal Finances in 8 Simple Steps
- 110+ Personal Budget Categories for a Fail-Proof Budget
- How to Make a Budget in 7 Simple Steps
Breakdown of the Cents Plan Formula:
The Cents Plan Formula consists of five categories – save, give, basic expenses, fun spending, and debt.
20-50-10-20-0 budget rule with some greater than and less than signs thrown in.
Plain and simple. Easy to follow.
That is the best way to ensure success with budgeting over the long term.
Save is listed first for a reason.
To save, pay yourself first.
Set aside a certain percentage every month. Store up money to be spent at a future time. Learn more on how to save money with these simple and easy tips.
Recommended Save Percentage – 20%
Types of items to save for:
Save for goal-oriented items, such as:
- Home improvement
- Must Needed Bank Accounts
Saving is very important in the Money Bliss Steps to Financial Freedom. Specifically, saving occurs in 7 of the 10 steps.
In the traditional 50/20/30 budget rule, this is the same amount allocated to saving. However, it becomes flat whereas with the Cents Plan Formula, you want to continue increasing your saving percentage.
Key Note: As debt is eliminated, the saving percentage typically rises to the recommended amount. Once Money Bliss step 6 starts, the save category would be greater than the recommended 20%.
Interested in FIRE? Learn more here.
The basic expenses in our life. Some people call it mandatory expenses.
Either way, it is the basic needs we need to survive – shelter, food, clothing, and a mode of transportation.
Basic expenses = bare necessity.
Examples of Basic Expenses:
- Mortgage / Rent
- Medical co-pays
- Auto repair
- Child care
Recommended Basic Expenses Percentage – 50%
Remember, we are focusing on the bare necessities!
The goal with basic expenses is to stay under 50% of take home pay. Then, cash is freed up to be used in another categories. This is the same as the 50/20/30 budget rule.
These expenses DO NOT qualify as Basic Expenses:
- Cable bill
- Eating out
- Hair salon
- Home improvement
- Dry cleaning
Spending more than 50% on basic expenses would stretch your money situation and leave you stressed out.
With basic expenses, the goal is to push these expenses lower!
Thus, a raise in salary does not justify a higher mortgage or a fancier car. Keep basic expenses well under 50% to attain Money Bliss faster.
If you struggling to make ends meet, then learn how to overcome when ends don't meet.
Be wary of lifestyle creep when a paycheck increase happens.
Key Note: If you are able to lower basic expenses to 25% of your budget, then 25% of your money can go to other things – like savings, travel, giving, whatever you would like.
Giving is generous.
It is a random act of kindness.
Decide where and when you want to give your money. There is a joy behind giving!
And remember, you might as well give some now because you can’t bury your money later.
Recommended Give Percentage – 10%
Giving happens in many ways…with your time, your money, or your talents.
It is your choice on how you choose to give and how much to give.
Give money is set aside for random acts of kindness or planned giving. The big debate on giving…Do you give 10% before or after taxes? Don't get stuck in the details – just give. Learn more how to start giving money when you never have.
This isn't covered in the 50/20/30 budget rule at all. Blessing others could possible come from your discretionary spending. But, it isn't defined as it is in the Cents Plan Formula.
Fun spending (AKA discretionary spending) is exactly what it is labeled – fun spending!
This is the space in our life that feeds our hearts. It is why we work hard to have fun spending money in our lives.
Spend your money where your heart desires.
Examples of Fun Spending:
- Eating out
- Kid activities
- Date nights
- Hair Salon
- Latest iPhone or other technology gadget
- Anything FUN!
- And my personal favorite…Slush money – spending money you can spend anyway you want without any questions.
Recommended Fun Spending Percentage – 20%
Fun spending is when you live life to the fullest.
Are you struggling with discretionary spending? Overspending each month? Then, learn how to stop spending money now.
During Money Bliss Steps 1-5, fun spending is typically well below the 20% threshold. However, if you choose to increase fun spending percentage during that time; then, realize it will take much longer to finish Money Bliss Steps 1-5.
Past Money Bliss Step 6, it is recommended to increase the percentages for fun spending and saving at the same rate.
One of the best ways is try a service like trim to cut down your discretionary expenses.
In the 50/20/30 budget rule, discretionary spending is set at 30% which is so much more than the 20% in the Cents Plan Formula. However, when money is tight and debt is present in your money situation, allocating that much money to fun spending is not a smart money move.
The flexibility with the Cents Plan Formula is the fun spending money can increase when your other category expenses are lowered. Something to remember to keep you motivated!
Key Note: Plus the best part, once you have eliminated debt, lowered your basic expenses, then increase the fun spending percentage with the Cents Plan Formula. This is the reason you worked so hard to pay off debt and build a strong foundation with money.
Yes, debt is part of the Cents Plan Formula.
The goal is ZERO debt.
Debt is the cash flow killer in your budget. With debt, it is impossible to do many of the above categories. Most debt (outside of a mortgage) is just overspending on items that we could not afford in the first place.
Recommended Debt Percentage – 0%
Don’t fret…it is possible to get out of debt!
It takes a dedicated plan.
The key to stay out of debt is to save in advance! Up your saving percentage for that big purchase and pay cash. Then, the chunk of debt eating up your percentages can be allocated to other categories!
Not sure which method to use – debt snowball or debt avalanche?
Unfortunately, debt is not even mentioned in the 50/20/30 budget rule. However, most households struggle with debt at an overwhelming rate.
Key Note: Don't get overwhelmed if debt takes up a huge portion of your income. You can and will overcome it. Figure out your pay off debt here to stay motivated on your money journey.
Get Out of Debt Help:
- How to Get Out of Debt in 5 Easy Steps
- 20 Quick Tips For Debt Payoff Motivation + Free Debt Thermometer
- Are You Making One of these Common Debt Payoff Mistakes
How to budget your money with percentages?
The Cents Plan Formula is developed to be flexible.
Allowing for changes as you go through various seasons in your life and on your money journey through the Money Bliss Steps for Financial Freedom.
With savings, you prepare for the unexpected, able to pay cash instead of going into to debt, or prepare for early retirement.
By eliminating debt and minimizing your basic expenses, there is money in the Cents Plan to go towards another category of your choice.
With giving, you are able to help others and provide a smile.
Fun spending is where you live your life – filling your heart with memories.
The last category is debt; in the Cents Plan Formula, it serves as a reminder of the slippery slope debt can cause in life. If you are debt free, make to avoid not falling back in debt trap again.
All in all, money is a part of our daily lives. We have to get to a point where we control our money and not be controlled by money.
With the Cents Plan Formula, it is simple and easy to formulate the spending of money.
Now, take what you learned about the Cents Plan Formula and turn it into the Cents Plan (AKA Budget).
This is YOUR Cents Plan. Not a budget. You decide where you want to spend your money.
Enjoy Freedom with the Cents Plan. A budget is too constricting. Learn to enjoy your life with money. Get out of debt. Save money. Live life.
Get your Cents Plan now.
Don't forget to read the Money Bliss Steps to Financial Freedom!
This guide to financial freedom will help you enjoy money and your life.
The first step of the Money Bliss step is to get your financial house in order. Learn how to budget in 7 simple steps.
More Resources For You:
- Money Mistakes To Avoid That Will Leave You Broke
- 12 Things I Quit Buying to Save Money
- How to Improve Your Finances with a Bare Bones Budget
- How to Organize your Personal Finances in 8 Simple Steps