When you're creating a budget, you probably start with a list. However, your budget is a lot more like a pie chart. You can only allot so much money to certain tasks, so it helps to think of it that way. Photo by jalbertgagnier.
As personal finance site Step Up Your Money points out, using a pie chart as a basis for your budget makes a lot more sense than using a list of numerical values. Pie charts are necessarily based on percentages, not specific figures. For example, fixed rent costs can vary from area to area, but a good guideline is no more than around 28 to 30 per cent of your budget. When you start to think of items in your budget as percentages, rather than specific numbers, you can gain some new flexibility:
By viewing your budget as a circle instead of a line, then you don't have to feel the squeeze when a new old line item has to get put back in. Removing the squeeze also removes the pressure from yourself. You don't have to feel like you've moved backward. Instead, you can feel like you have the ability to handle the situation — which is the whole point of budgeting your money in the first place.
If your savings category is a set percentage of your income, you can shift goals without upsetting your budget. Maybe you need to rebuild your emergency fund this month, but set some away for retirement next month. It all comes out of the same goal. While you can end up at the same conclusion by doing the maths manually with specific numbers, dividing your budget by percentages helps make those decisions before you come to them.