We’ve all heard the expression “budget your money” point the common phrase is shuddered from the rooftops in virtually every personal finance book. What’s ironic is that even though the books are about personal finance there’s nothing personal about a set structure that some one Decides is “optimal” for you.
While the last thing I would ever do is say that budgeting doesn’t work, what I am saying is that there is an approach that works for every person on this planet and if you have a flexible income like I do these rigid boxes that we put ourselves in can be self created prisons.
While that might sound a little harsh a common sentiment in the financial independence retire early community or fire for short is that if you want to retire early you need to cut out all pleasures in life and essentially eat rice and beans for the next 20 years.
What about those people that actually want to live a decent life now while still hitting their long term financial goals?
What I mean by that is let’s take an example where Jerry earns an average salary of $5000 a month. After accounting for all insurance costs and taxes, his after tax pay is $4000.
From there becomes retirement accounts, Rent, daycare, car payments, student loans, groceries, utilities, etc, At the end of all this pay Jerry is left with $300. Whoopee!
Just stick with this plan for the next 20 years and Jerry might be able to live a somewhat average life!
Coming up with a budget is more important now than they’ve ever been because everyday items are getting exponentially more expensive.
**Disclaimer: I am not a financial advisor nor do I claim to be. Make investments at your own risk and do your own research to formulate a plan that works best for you! I do not assume any responsibility for your decisions.**
What is Budgeting?
Simply put, budgeting is the act of putting money aside for average expenses like groceries, travel, restaurants, mortgage payments, And pleasures like Netflix subscriptions.
Having a budget is an absolute necessity if you ever want to have control over where your money goes and your long term growth.
What’s Flawed With Budgeting?
There is a problem with budgeting at least in my eyes when it comes to putting money aside. You create this box for yourself where you almost feel like you have to hit a certain number in order to get ahead.
For example let’s take Jerry again and if for some reason Jerry has a tire blowout, his standard budget for that month gets messed up. And very likely, jerry is mad because he doesn’t have the allocation necessary for all of his respected buckets.
As Parkinson’s law states work expands to the time allotted for its completion. Another way of saying that is if you give yourself $5000, naturally you will figure out ways to use it.
Alternatively, if you give yourself $3000, you’ll figure out a way to use that same amount therefore leaving the extra $2000 to use as you wish.
That’s the importance of budgeting is you give yourself parameters to fit the money within so you can put the extra aside for retirement or your future self.
So what about people that don’t have this consistent income every month and our commission only?
What About Commission Only Reps?
If you’re anything like me, you make money purely on commissions and Either own your own business, a 1099 employee, or are in sales, or something in between. Fortunately for most in a Commission only role, your income is directly tied to the value you bring to the company. As a result in most cases, Commission only reps often have a much higher compensation.
Therefore we are not able to rely on the same set budget every month as it can drastically change one month to the next. While I view this as a great thing because it is a massive motivator, having that flexibility can be a bit daunting at first.
I view commission only pay as a blank canvas where you can create the future you want based on your goals and what you find joy in.
As most commission only reps are, we enjoy making money. That uncapped ceiling can be a great motivator as you can dictate how much income you can make. Unlike other roles where even if they provide $100,000 worth of value per month, they might only get paid a set salary.
Which is fine for some if they want that stability but those who have that ambition deserve to be paid in proportion to how much value they bring that company.
Simply put, if you have productive output you can expect the input to be well compensated. So why not pay yourself accordingly to what you have earned? My advice might go against what some financial gurus might claim and that’s fine.
I’ve followed my advice for years now and I’d like to think I’ve done pretty well for myself. Here’s my idea, if you choose to implement it.
Rebelling Against A Set Number to Hit Every Month
As mentioned earlier, a lot of people blindly follow a recommendation by personal finance guys about set structures in their budget.
While I absolutely think a budget is essential, not everyone has the same pay and in many cases, our pay can swing 50% month to month. My recommendation is to come up with a budget that is flexible enough and personalized enough to fit your Specific situation.
Wouldn’t it feel good to have peace of mind knowing that every dollar has a purpose and you’re not chained to one set dollar figure that “Have” To hit in order to get ahead? I’m mentioning percentage based budgeting.
What Is Percentage Based Budgeting?
While I’m not the first person to come up with this idea as I’d imagine there’s plenty of people all over the world who have come up with something similar.
I haven’t found many resources out there that articulate this specific situation in which Commission only reps are experiencing. Percentage based budgeting is simply taking your flexible income every single month and giving yourself clearly defined percentages in which your money will be bucketed.
For example if you know that your living expenses account for $2500 every single month then that’s a non negotiable that you will need to allocate for.
However, if your debt free then the equation opens up a little bit and you are able to be a little bit more flexible in your allocations. Let’s take an easy example of Jerry from earlier;
If Jerry earns $5000 in commissions from his sales job the average person should spend no more than 30% of their living expenses on housing.
If you start to creep above that number for any reason you seriously need to reevaluate your living situation and see if it is the absolute best decision for you and your family long term.
So in this example Jerry’s living expenses with rent and utilities all in is $1,500. From there, Jerry works as a commission only sales rep so he needs to be responsible for his own taxes. After consulting with his cpa he’s come to the conclusion that every paycheck he needs to put away 15% for taxes.
Now Jerry needs to be able to put food on the table so he allocates another 20% for lifestyle and everyday expenses which puts him at $1000. Jerry and his family liked to travel and it is a big priority for them in their life so they allocate 10% of every paycheck towards travel expenses.
Long-Term Jerry and his wife sherry want to live abroad using their retirement funds. So a non negotiable for them is to put away 15% for retirement.
That leaves Jerry, Sherry, and Larry their child with 10% for miscellaneous expenses and anything else that they want.
While this is a rough idea of how percentage based budgeting will work, it’s important to know that this is extremely flexible based on your goals and interests.
Going back to the earlier point, if you have zero debt then instead of the 30% for housing, that will go to 10% for utilities and property taxes (as an example) You now have 20% to play with and in many cases, that 20% should be allocated accordingly for retirement and a little bit extra for travel or some kind of experience that is important for the individual.
For my wife and I, travel is a very important part of our life so we typically contribute at least 10 per cent of every paycheck towards a trip as that is what brings us a ton of joy.
Percentage Based Budgeting Benefits
One of my personal favorites about percentage based budgeting is that you can have your cake and eat it too whereas it doesn’t have to be so black and white like some people think you have to save 80% of your paycheck towards retirement.
You can adjust it based on upcoming goals or desires and turn the dial down or up according to what’s important to you. Alternatively, If you have a lot of debt, rather than the retirement fund, a great practice would be to shift 100 per cent of extra savings towards paying down debt as that is a 100% guaranteed return.
So the more aggressive you can get with that the better. Just try not to sell your soul and eat rice and beans for five years in order to pay off your debt. While there are not many better feelings in the world than being debt free, you have to remember to live a little bit.
That’s why percentage based budgeting is so incredible because anybody on the planet can afford five per cent of their income to be put aside for a fun activity down the road or some level of adventure. It might take longer than your peers to save up for whatever that adventure might be but the feeling of making progress in multiple areas all at the same time is hard to put into words.
For years my wife and I were all or nothing mindset people where we would put all of our savings into paying off a car loan, a personal loan, business loans, and we’ve sacrificed years doing so.
Looking back, I’m grateful that we are debt free but knowing what I know now it definitely would not have hurt much to put aside a couple hundred bucks a month to enjoy life a little bit. I don’t think people’s purpose in life should be to focus only on paying off debt I think that’s a great way to lose yourself.
You have to remember to treat yourself occasionally too.
As time goes on, naturally, you will improve in your skill set and your income will improve as well. And that can be an incredibly motivating factor to further expedite your growth.
Motivating Factors To Hit
Pulling from the example with Jerry again. Jerry finds his groove and his average pay goes from 5000 to 10,000 dollars a month he quite literally doubled his speed to put away these buckets that are important to him. So instead of $500 a month for travel, he saves $1000 a month.
Instead of 750 in retirement, he saves $1500 per month. As most of you guys know, compounding interest is such an amazing wonder of the world and as nothing to take lightly.
As time progresses, these incremental changes in percentage based budgeting add up a ton in the long run. That is what allows someone to go from 20 years to retirement to 8. Or someone to be able to save up to go to Disneyland in two years in just 10 months.
My personal favorite about percentage based budgeting is I’m no longer trapping myself in a mindset of I need to hit a set dollar amount every month but I know that every single dollar I earn is continuing to expedite the process for a better life in the near future.
Every single dollar that comes into my pocket is an extra dollar that I can invest to continue working for me not the other way around. Every time I increase my income that gets me one step closer to this ultimate goal of financial freedom that most people have.
I’m extremely thankful that I have come across percentage based budgeting as it truly has been the most effective way for me to have peace in mind knowing that I can enjoy life’s pleasures while also taking care of future me and my family.
Thank you so much for reading god bless and stay tuned! If you haven’t already please check out my prior articles as there’s a lot of valuable content around financial fitness or family related articles. Thank you so much!
