Personal financial success can depend on sticking to an appropriate budget -- and selecting one is half the battle. Choosing an appropriate percentage of your income for living expenses depends on several factors, including your lifestyle and the cost of living in your location. Using your after-tax income provides the simplest means to establish a budget. You can start with a basic percentage guideline and modify your allocations according to your situation.
Budgeting for your housing expenses includes your rent or mortgage, utilities and other fees associated with managing your home. For example, your housing budget should include miscellaneous fees, such as monthly pet fees, if you rent. The total amount for housing should not exceed 30 percent of your after-tax income. If you earn $40,000 annually, then $1,000 per month is your limit. You can budget your housing costs further by setting a monthly spending goal for utilities and other payments. For example, you can set your housing payment to $700 per month and apply the remaining $300 to utilities, cable and other fees.
Clothing, food, toiletries, loans and related expenses also consume a large portion of income and the percentage of income required depends on family size, lifestyle and other factors. Ideally, you should not spend more than 15 percent of your income or $500 per month on these items if you earn $40,000 per year.
Transportation plays a significant role in earning your income and covering this living expense is equally important. Your transportation costs should not exceed 15 percent of your after-tax income, or $500 per month for an annual after-tax income of $40,000. But, depending on your type of transportation, the monthly amount can get tricky or exceed 15 percent. For example, if you make a monthly car payment, your transportation budget becomes a fixed expense and added expenses, such as insurance, maintenance and gas, drive up the cost. If you use public transportation, you can better control the expense by purchasing discounted travel cards if your local authority offers them.
You should allocate the remaining 40 percent of your income to a mixture of non-essential, but important living expenses, such as entertainment, dining out, savings and debt repayment. Allocating 10 percent of your income to each category further helps control monthly costs. For example, you could spend approximately $133 per month on restaurants, medical bills and movies. The remaining $133 can go into a long-term savings account for emergencies and other financial goals.