Three Problems With Percentage Based Budgets vs. Minimal Budgets
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.
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.
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.
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.
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!