Three Problems With Percentage Based Budgets vs. Minimal Budgets

May 12, 2016

Have you ever wondered exactly what living minimally meant? Or how to budget? Or if there were different types of budgets? I've been talking all month about my minimal budgets, but today I'm talking about why I do minimal budgets vs. percentage based budgets! Click through to read more!

Today to continue on with the series of living on less I’m talking today about the difference between the typical budgeting process of using percentages to divide up your income and the way I approach “budgeting” by living minimally and keeping my cost of living down. I put the word budget in quotation marks because I think that word means something different to people when they read it than what I mean when I type it.

When people think of budgets I think they tend to think of restrictions being put on your money. Or they think of a budget as a way to tell them what they can afford to spend on things. I  tend to think of budgeting as just finding an amount you can live on, and sticking to that. Living minimally (and using a budget to help you do that) to me is a lifestyle change and other budgets are just a diet of your current lifestyle.

Make sense friends?

But I’m getting ahead of myself here! Let’s talk about the three main differences between the percentage based budgets and minimal budgets (or minimal living). ;)


The Problem With Percentage Based Budgets vs. Minimal Budgets

ONE // SPENDING

Percentage Based Budgeting

On a percentage based budgeting you ask how much you can spend on everything. How much can you spend on an outfit? Going out with friends? Or even your rent? You base all your purchases on what you can afford. Which, in theory might sound like the right way to do things, but in fact it is teaching you that just because you can spend money on something, you should. Which isn’t the case and isn’t going to lead to you saving any of it.

Minimal Budgeting

When you change your budget from thinking what money you can spend where, but what money you should spend where it changes the way you think about your finances and what you do with them. Living minimally and on a minimal budget doesn’t mean you spend money just because you can, it means you spend money when it is necessary or when it is something really important to you. Purchases become a bigger decision from your heart and mind, not just from the logic of “I can spend that money.”

 

TWO // INCOME

Percentage Based Budgeting

Typically with percentage based budgets when you have a change in income like a raise, a common thing people do is increase their spending and sometimes even bills. After all, in that type of budget where the amounts are based on percentages of your income, when your income increases so do those amounts. I see this happen a lot and I don’t think people really realize the effects of it. When you increase your cost of living because your income increases, you are now in the exact same spot financially as you were. You might have more things but you don’t really have more money. This situation doesn’t lead to any more savings or building of wealth. All it does is make you continually dependent on that job and that money.

Minimal Budgets

When you have a minimal budget you are focused on getting your cost of living low enough to be comfortable but also doable. Once you have found that cost of living, there is no reason to increase it, even if your income increases. You’ve already found an amount that works for you so why would you increase it even if you start making more money? At that point now, all that extra money you are making will be going towards savings, or debt, or an investment in your future! That is a big step towards being able to build up your savings!

 

THREE // PRIORITIES

Percentage Based Budgets

With a percentage based budget it doesn’t really take into account your personal situation, goals, or priorities. Typically a percentage based budgeting puts a “one size fits all” framework over your income. If you don’t know any better than you follow that and allow your finances to be dictated by someone who doesn’t actually have your best interest at heart, simply because they don’t know you or your situation. Percentage based budgets are great for guidelines when you are starting out, but are not truly one size fits all.

Minimal budgeting

When you start to minimize your cost of living you minimize the things you are spending your money on. When doing this, you will naturally eliminate things that are not important to you. By doing that, your budget will reflect what is important to you and what matters to you most. This includes your goals (financial or other),  what you care about, and what your priorities in life are. You choose specifically what you want to spend your hard earned money on. Not, because you can afford it, but because you want to spend your money on it, because it is important to you!


 

Phew! Okay, does that help? Those are just three differences between percentage based budgets and minimal budgets. In doing a minimal budget myself and in teaching others how to do one, I wanted to be able to explain exactly what the differences are and why I specifically teach the minimal way.

If you are ready to take on a minimal budget I have just the thing for you! I created a free 7-day email course that walks your through the beginning changes of mindset and numbers in order to create a minimal budget that works specifically for you!

Click the image below to sign up!

It’s important to know what works for you and what applies for your lifestyle in order to be successful

I know this will help you do that!

Lydia

2 thoughts on “Three Problems With Percentage Based Budgets vs. Minimal Budgets

  1. Lisa Boyes

    I am in my mid-50’s. At 49, I had to stop working for a living and go onto full-time (lifelong) disability on Social Security. I live in an apt. complex for disabled/elderly people only (i.e., you must either be permanently disabled or be 62 years of age or older). This year our cost of living assessment (COLA) from Social Security did not give us a raise. Next year our raise will be .2%. I have to buy a Medicare supplement to pay my dr. bills. The premium for that policy is $249/mo. this year. It goes up $20 to $25 a month ea. year. One month after I moved in here last year, all our rents went up $20/mo., because our gov’t rejected the property mgr’s budget. We can’t get vouchers to use at the Farmer’s Market because some of us are not yet 60 years old. (Those who are 60 and older got them). Twice in my working years, as soon as I made any decent $, I lost my job. So first, I’d warn anyone in their 20’s to SAVE, because once you’re 40 or older, employers get rid of you for someone younger they can hire for a cheaper wage and benefits pkg. Secondly, if you get sick at age 31 like I did, you can be completely on your own as to how to deal with it. Thirdly: What would be your suggestions for those of us who are stuck living on a fixed income the rest of our lives, and our fearful that even the benefits that we worked for and do have will be taken away? Thank you.

    Reply
    1. Lydia Lois Post author

      Hi Lisa!

      I’m so sorry to hear those situations you’ve been put into! It sounds like it was one thing after another! I love your comment because it does give perspective for things in later years and how you never know what could happen! I love your advice to save money NOW, it is so true! Now it’s definitely hard for me to give advice as I have not been in that situation but since you asked I can tell you off the cuff my thoughts. Simply looking at what you said that your income is fixed and not changing, your only true option that will move you forward is to get ALL your expenses (bills + any and everything you spend money on) under that amount of income, and under enough so that you can save at least a small amount each month. It will most likely be uncomfortable for a while and hard but once you work with your money, bills and spending, you can get used to it or just find ways that do work and are not uncomfortable to do. It’s all about, for me at least, getting those bills and expenses down to the minimum amount they can go! I hope that makes sense and helps a little!

      Reply

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