The Balanced Money Formula
Building a budget is one of the basic tasks of personal finance. But not everyone can keep a budget. As much as I’d like to, I don’t feel comfortable with detailed planning. I continue to use a spending plan as a rough guide to my future, but a traditional budget just doesn’t work for me.
Last night I stumbled across the Balanced Money Formula proposed by Elizabeth Warren and Amelia Tyagi in their excellent book, All Your Worth: The Ultimate Lifetime Money Plan [my review]. Like my spending plan, the Balanced Money Formula is an alternative to traditional budgets. Though I considered this concept a little “light” in the past, it really hit home yesterday. It helped me to realize that my own spending has become unbalanced.
The Balanced Money Formula
The Balanced Money Formula is based on your net income (your income after taxes). Warren and Tyagi say that, ideally, no more than 50% of your paycheck should be spent on Needs (and keeping them below 35% is best). Of the remaining amount, at least 20% should be devoted to Saving, while up to 30% can be spent on Wants.
Here’s what it looks like:
That’s it. Simple. Three categories. No detail. This is the sort of Big Picture budget that I find useful, and in this case I could see that there was something wrong with my Wants. Here’s how the authors define these terms:
- Needs are things you must pay no matter what: housing, food, utilities, transportation costs, insurance.
- Wants are everything else: cable television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.
- As in the list of tips I shared a few days ago, Saving comes last in this plan. Everything left after you take care of Wants and Needs is set aside for the future. (If you want to get out of debt, that’s also tackled here.)
Warren and Tyagi write:
When your money is in balance, you always have enough to pay your bills, have some fun, and save for your dreams. And here is the best part of all. Once your money is in balance, you can stop worrying about it. Managing your money becomes automatic.
This Balanced Money Formula is a goal. It’s an ideal. If you’re just beginning to manage your money, your financial life will probably be distinctly unbalanced.
For example, if your income’s small (or your mortgage is large), you might be spending 80% (or more) on Needs. If you are a compulsive spender, if you like to dine in fine restaurants or to collect Hummel figurines, you might be spending 45% of your income on Wants. And, of course, few people starting out can afford to set aside 20% of their income for Savings.
Here’s what that might look like:
Small income/Large mortgage
| Needs: 80% | Wants:15% | Savings:5% |
Compulsive spender
| Needs: 50% | Wants:45% | Savings:5% |
Here’s how your budget might be out of balance if you’re trying to reach a goal:
Someone trying to build their emergency fund
| Needs: 40% | Wants:25% | Savings:35% |
Someone who is financially independent
| Needs: 30% | Wants:55% | Savings:15% |
The authors say that your goal should be to move from your current state to something more balanced. For some, that’s as simple as re-prioritizing expenses. For most, it’s not that simple.
When your Needs are too high, for example, you severely cramp both Wants and Savings. Because most of your income goes to necessities, you don’t have enough for fun or for the future. To remedy this, you might need to take drastic action. You might need to move into someplace more affordable (perhaps even to a different city). You might need to find a better-paying job. These are not easy steps.
Life Out of Balance
In many ways, the Balanced Money Formula is brilliant. I agree wholeheartedly that Needs should be kept under 50% of net income. (I think it’s a good idea to split Needs: about 25% for housing, about 25% for all other Needs.) I also agree that saving at least 20% of your income (or using that money to repay debt) is an excellent way to find the path to wealth.
But what about that 30% for Wants?
Excellent question, and here’s the truth: I’m spending less than 10% of my income on fun, and I can tell. I’m growing a little cantankerous in my old age. I’m letting things like a trip to the movies raise my blood pressure, when I should just be enjoying life. I’ve paid off my debt. I’m not spending foolishly. I can afford to go to a movie, even if it is expensive. I can afford to spend the extra 29 cents to have a great mug of cocoa.
All Work And No Play
I’ve written a lot lately about frugality, and I’m not about to give up my frugal ways. Thrift has been successful for me, has helped me to build wealth. But as some readers have noted, one reason to save money is to enjoy it. It’s not just for the future, but for today. Re-visiting the Balanced Money Formula last night brought this point home to me.
I’ve allowed my own money equation to become unbalanced again. Over the past few years, I’ve become a Super Saver. Initially, this money went to debt reduction; now it goes to saving and investing. I’m proud of paying off my past and providing for my future, but maybe it’s time to spend a little money on today. Maybe it’s time to indulge myself. Maybe it’s time to give myself a budget for fun.
The Balanced Money Formula puts a lot of minds at ease. It can definitely help you put your finances in automatic mode. But its simplicity also lends itself to being applicable to other life circumstances. If you’re reaching for a goal, letting yourself get out of balance with the formula is what naturally happens. I also think being out of balance is something that should last only for a certain period of time, but what do you think?
To learn more about the Balanced Money Formula, borrow the excellent All Your Worth from your public library, or check out this interview with the authors. Photo by SuperFanastic.
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There are 111 comments to "The Balanced Money Formula".
This seems like a good system, though I personally would have put more money towards saving/investing.
Well, its a great concept. I think the crux of this concept lies in its simplicity. I am student and still not earner but I guess this tip will work wonders for me in the future.
I’ve also dabbled in an overall view as well as budgets. I’m still not quite sure which I like most though I did write an article on 3 Simple Schemes to Split your Paycheck. I also included 30% ‘Wants’ in one of the schemes 🙂
I think I’ll give each system another try and see which one I favour most.
My only problem with this formula is that it doesn’t leave any money to give away. Maybe your budget will be balanced, but you may become spiritually unbalanced.
In my opinion, at least 10% should be budgeted towards charity. It doesn’t matter if you are religious or not. Giving away at least 10% helps towards cultivating the right attitude towards money and enables you to become a positive contributor to your community in ways other than just buying stuff from corporations. Money then becomes a tool and not a goal itself. If money is the goal, your life can become quite miserable – especially in rough patches like these.
It’s addressed specifically in the book. Charity belongs in the “Wants” category. If you enjoy giving money away, that’s the pool it comes from.
I would personally include it in the “needs” category. That is my perspective on what kind of expense it is… a “must” for me.
The way I see it, I already give money away to “charity” every paycheck in the form of taxes that are used to support medicare, social security, entitlements, etc.. Any additional giving should come from the “want” category. It is not a need to donate money to charity but you should want to donate what you can. Unfortunately, with the rising cost of education, and my own retirement there is not a lot left to give – and certainly not another 10%
This is a great post. Its good to be reminded of the basics once in while.
Hi J.D.
“Are you making enough room for fun?”
This quote struck a chord with me. I think that I might be saving too much right now, and my “saving percentage” is at about 60%. When I spend money on something, I feel a little sick because I’m so used to saving, and I don’t think that’s such a good thing.
In my defense, I think it’s because I’m saving for something that I want later on. My fiancee and I are living in each of our parent’s home right now because we’re saving for a wedding in February. Also, we’re eating out less and only doing things together that don’t require money, like reading, walking and watching old dvds.
Do Warren and Tyagi mention anything about the time span to which this formula pertains to? For example, maybe I’m saving 60% now, but after the wedding, it may balance out to 20%.
I think the smaller the chunks of time, the harder it is to balance this equation. Your thoughts?
JD this is a great post. This is exactly how my husband and I have structured our budget (although ours is 40% needs, 30% wants and 30% savings). We have also balanced our savings so that it is 20% long term (saving for a house)and 10% short term (holiday/new car/etc). Being in Australia our retirement savings are automatically taken out of our gross pay so we don’t need to wory about that aspect. I thin that once debt is erradicated and you have worked out what your needs are consistently this is a really good budget to use but I can see how it might be more difficult if your finances were a little messier.
@ Phil and Pat with SPI… I think both of your comments can be answered similarly- this is what the needs category is for. If you want to be a charitable person then in my opinion the only place this should come from is wants, unless you are able to structure your life so that needs come in under the 50% mark. Pat with SPI, having just saved for and paid off my wedding this year, I think that a lot of wedding expenses come down to wants as well. While saving for my wedding I didn’t sacrifice my regular savings at all. I could have had a dirt cheap wedding but I didn’t ‘want’ one – so any extra money I needed to spend on it came from my ‘wants’ category rather than my needs or savings, I went a year with less new clothes, dinners out etc but it was well worth it.
I guess in order to sell books, you have to come up with the magic formula.
I think that approach is nominally helpful. The proper approach, IMO, is to build your budget based on long and short term goals. That might mean your savings bucket is 50%. Might mean it’s 5%.
There isn’t a cookie cutter answer that works for everyone, and assuming there is can be couterproductive.
Phil, I think tithing (or charity giving) could be placed under “needs” or “wants” – depending on your perspective. I don’t see why it should be given its own category.
That is absolutely one of my favorite financial books, and the one I gave my friend to inspire her to get control of her finances. I’m glad to see you’ve rediscovered it.
I find these money ratios to be arbitrary. Savings should come first, then needs, then wants. The problem for people is categorizing everything properly and putting everything into balance. Being a miser is no fun because you might die tomorrow and being a spendthrift is a blast but you might not die soon enough.
My question, when it comes to things like this, is where does retirement savings, specifically, come in? Is it a ‘need’? (It is.) Is it ‘savings’? (Yep.) How about after-tax vs. pre-tax? Do I count the 401(k) contributions, or how about IRA vs. cash savings? I can’t decide. I sort of ignore the 401(k) contributions now (since they’re magic and in the background, so mostly I just pay attention to how crappy the balance on that account is, lately 🙂 ) but the IRA thing confuses me. I guess it’s not critical, it’s just confusing when people throw blanket statements out there like “you should be saving 20%!”
JimmyDaGeek wrote: I find these money ratios to be arbitrary.
The authors explain the reasoning behind their choices in the book. They also make it clear that different people will have different situations, and so the actual balanced formula for you may be different. The main formula is a good “rule of thumb”. If your Needs are below 50%, you’re in less danger of being sideswiped by disaster. If your Saving is at least 20%, you’re doing a good job of building for tomorrow.
They do say that they consider getting Needs under 35% ideal. And since they still think your Wants should be under 30%, we can conclude they actually think people should be saving 35% of their net. That seems like a hell of a lot, but again: this is an ideal.
I guess what I’m saying is: Do what works for you. I think the Balanced Money Formula is an excellent framework, especially for somebody like me who doesn’t work well with detailed budget systems.
I agree with Sabrina! I’m currently a graduate student living off a very low income ($1000/month CDN). I do occasionally get a research assistantship that helps, but that is never guaranteed. Sixty-five percent of what I earn generally goes to fixed expenses.
I have been putting money aside every month for “savings” and “retirement”. And any time I receive unexpected money, it goes right into my savings. In total, I’ve put away $4337 (thanks to blogs such as this one – shout out to JD!).
But I am a bit confused about where my retirement fits in, and frankly, whether I should be saving any money for that at all right now (although my father says that by the time I’m done school, I’ll be eligible for old-age pension — hey, I’m only 27!). Also, I’m not entirely sure what I’m saving for — is it for when my funding runs out next year or for a longer-term goal of buying a house? Or should I divide that money up into two different categories (Thank you ING)?
And by the way, I don’t have any money set aside for charities. I give my time away instead; maybe when I have a more stable income, I’ll switch to cash donations… but everyone always says that time is money, right??
First, I love the photo of the dog with his “Bucks.”
Two, I’m a big fan of Elizabeth Warren so I’m going to plan to pick up this book and give it a read.
Having a real budget is something we’ve been thinking about, but we have not yet gotten past the spending plan phase. The thing I don’t like about a budget is it ends up being too rigid for us. If I want to spend more on eating out one month or spend more on clothes one month I just want to do it. Which is why I like our spending plan, we’ve got our needs (and regular wants – i.e. cable) accounted for on our plan, we’ve got our savings taken care of by our 401k and our various savings goals, then we’ve got our misc. money (allowance) which is spent on needs (i.e. grocery bill, dry cleaning) and wants (i.e. eating out and fancy new duds).
But, I do think we need more money for fun and I’ve even started thinking about adding fun to our monthly savings (having a fun account like we have a vacation/travel account).
I read this book last week, and also loved the big picture they offered. It really showed me why we were having so much trouble saving– our needs were well in the limits (46%)– but our wants included two big budget items: private school tuition and giving to our church and other organizations. Those are wants– not needs– and it helped us say, well, those are things we’ve chosen (and school only lasts till 8th grade, not much longer), so that means we’ll have less to spend on movies, etc.
But it explains why we’re tight, and now we understand that our priorities are these things for now, so we’re cool with that.
The other critical point I loved was that you make huge mistakes when you turn “wants” into “needs”. In other words, cell phones and health clubs are wants– until you sign a legal contract. So a big key is making sure you don’t turn “wants” into legally enforceable “have-to’s”. And credit cards do that to you.
It’s good to remember that you can quickly throw yourself out of balance by using credit.
I just had to say excellent choice of photo!
Does anybody have a suggestion for tracking gas costs????
I do get reimbursed by my company for driving with them, but I tack about 500 miles a week on my car and currently spend more for gas then I do on rent (it all eventually gets covered, but I confuse myself when trying to work percentages). It may be a unique situation, but almost 35% of my take-home pay is spent and then reimbursed for transportation, so it’s gotten a bit crazy. Any suggestions on how to qualify that?
P.S. If the 401k contribution is taken out automatically (like most are) I would consider that part of the “tax”. Yes, it is savings, but it looks like the idea is to track this in take home pay (which 401k is not included in).
Just my thoughts.
Great post!
I decided to work up my own numbers, and based on this method I am currently:
50% needs
28% savings (401k + other savings)
22% wants
I must say – before even calculating this – that I have been feeling lately that I am now finally at a very good point financially in my life … and this “budget method” seems quite on-target to me. If only I had followed this method sooner in my life!
In my 20’s and early 30’s my budget was more like: 90% needs (huge mortgage), 15% wants, -5% savings (credit card debt increasing every month). It was a miserable way to live! I was stressed out & pinched pennies like crazy, and always felt behind. I hated it.
This budget is a great goal.
Maybe folks in their 20’s won’t be able to attain it, but can strive for it.
Maybe folks in their 50’s+ should save more like 30-40%, towards their retirement, if they’re been able to live comfortably but haven’t been as good about savings in the past.
I’m definitely going to read the book. This method seems simple enough for most folks to grasp easily, although it may need additional tweaks for each individual (such as for tithing, etc.).
Thanks, JD.
I’ve followed your blog for some time, but this is my first response.
I read All Your Worth a few years ago while working for a library and it made me realize that I, too, was allotting too little for wants. Each check I would send every extra penny to the credit cards, just to turn around and put stuff back on them.
However, if I started out by allotting closer to 30% to my wants, I stayed within my budget. I didn’t feel deprived and my credit cards have been steadily going down.
I think it’s just a matter of finding a method that works for you and forgiving yourself for any setbacks. I can see the light at the end of the tunnel in about a year. I wouldn’t be here without that book. I’d probably still be beating myself up for overspending every month.
I really appreciate this posting. I was missing a basic concept to pin all the complex tracking and ideas etc around. This is it! One can make this as simple or complex as they want. Also, about the “giving” comment- I’d track it under “wants” as one would “want” to give- not “have to”.
Recently read the book from the library and really liked it. As someone with not much head for details, having broad ratios really helped me.
Good post. As for the not spending enough on Wants, what I would say is keep the discipline and don’t spend on trinkets that don’t entertain… but on things that will last longer or not fill your house. I’d spend it on a cool vacation.
Where do student loans fall into this? I would guess under the Needs column. If that’s the case I am at 64% needs, 23% wants, 13% savings. I’m actually kinda surprised I’m not over 30% on wants already.
Yes, where do student loan payments fall into this? Also, does anyone know how to set something like this up in mint?
If you’ve been a super saver for the past few years, you deserve to cut yourself some slack. I would imagine by this time that your financial position is more secure than it was back when you started right? We’re just starting out on the road to financial solvency. I know what you mean about becoming a fun deprived grouch though. It’s no fun at all but I guess it’s the price that has to be paid for all the other years of having too much “fun” perhaps. Maybe you’re just a little afraid that upping your fun money allowance will lead to “slippery slope” spending.
Looks like a good way to categorize things & decent rules of thumb.
This made me laugh: I’m letting things like a trip to the movies raise my blood pressure, when I should just be enjoying life.
Trips to the movies usually raise my blood pressure too, but it’s not because I’m not enjoying life, it’s because I’m not that jazzed on the moviegoing experience and there’s usually a dozen things I’d rather be doing. The last movie I completely enjoyed was Sex & The City, because we went to a special theater that was 21 only, had a bar, a smaller auditorium, and NO ads.
(And yes, I am comfortable telling people “no” when I’m asked to go to movies.)
Thanks for this post. I’ve been enjoying your blog as my husband and I work towards our goal of getting out of debt and on the path towards building wealth.
I’m happy to say that if I count all the money going towards debt payoff as “savings” then we’re right on track with this formula. And I feel like we’re in a good place. We’ve cut out expenses and are doing our best to pinch pennies, but still leaving room for plenty of fun.
Anyway, this post helped me to realize that maybe I shouldn’t try to cut more of the “wants” out. I don’t think I’d want to live longterm spending less on fun things than we are now.
Theoretically, if you want to live in a more exspensive/nicer place, you could justify taking more out of your “wants”, i suppose.
Still, 50% for someone in their 20s can be VERY hard, if not impossible. :[
I just calculated mine. I am 23, married. This is calculated on take home pay, ie. after taxes, benefits, and 401k savings.
45% Needs
19% Wants (Includes church giving)
36% Savings
I live in Oklahoma, so the cost of living is relatively low.
There are a lot of things that I’m not sure how I’d categorize them based on this system. Is my 401k contribution savings, or is it not counted at all because its not “net” income? (Someone else already mentioned this)
Is my car a need or a want? The post says transportation is a need, but I specifically spent an extra $6k or so on my car to get the turbocharged sport model, when I could have got the standard model and drove to work in that one just fine. I don’t think the upgrade to the higher-end car really qualifies as a “need”, but I only make one car payment. Should I split it as 75% need, 25% want?
What about saving for a down payment on a house? It’s savings. It’s for housing, which is a “need”, but it’s not really strictly necessary to keep me out of the cold in the winter, so maybe it’s a “want”?
Depending on how I classify these things, because they’re *big* things, they will completely change the way these numbers work out.
I read this book last year. To answer a few questions:
Needs are things you *have* to have, either because of basic dignity (shelter, basic clothes, basic food) or because you are contractually obligated. These are things you would have to pay even if you lost your job and had no money. A cell phone might be a want, but if you have a contract it is now a need. You have to pay it.
Savings target actually comes *before* wants.
Anything else is a want. This includes food and clothing over and above the basics.
Charitable giving could be classified as either a Need or a Want, depending on how strict you are about the necessity of the giving. If you would tithe even if you were on the way to bankruptcy, it would be a Need for you. For most people, however, giving woudl be a Want.
401k/RRSP/pension contributions all count towards savings
Debt repayments, above the minimum, can count towards savings.
The goal is to get your needs below 50%, because that’s usually what people can afford to pay in the event of job loss (one job left in a couple, or unemployment checks, etc)
Goodness, I either have too many necessities or need to make a ton of money :)))
I’ve always suspected that my needs are too high. But since they are needs/necessities, it’s very hard to get rid of them. I’m working right now to free up that category from my car payment (and once the car is paid off, i can get a cheaper car insurance) and student loans. Once I take care of these two, I will be right at 50%.
Living in a cheaper place is not an option as I live in San Diego and going cheaper would mean venturing into a dangerous territory…
I think the percentages, like JD mentioned, are not hard and fast rules. It really depends on when you started saving and investing. If you began at age 20 saving 20%of your income and continue until age 60, you could expect to be in great shape financially and could probably start by saving a smaller percentage at such a young age. However, if you are 47 and just now starting to save for retirement your percentage that needs to be saved may be much higher than 20%, depending on how much money you want to have when you retire. Still this is a good guide line for the general public who hate paying attention to the small details of a budget.
Chett
http://www.my5k5k.com
I’ve been looking at my budgeting like this for a while, based on the msn article on a 60%/40% breakdown. Theirs is based on gross income so taxes are factored in.
60% goes to committed expenses, including housing, food, charity, all bills and taxes, and basic clothing needs.
The other 40% is broken down into 10% for each category: retirement savings; long-term savings, doubling as an emergency fund; short-term savings for irregular expenses; and fun money.
It helps me to sub-categorize my savings, but essentially it’s the same plan outlined above except 60% needs, 30% savings, and 10% wants.
http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/ASimplerWayToSaveThe60Solution.aspx
Well, it’s a great ideal and a great guide, but not exactly realistic for everyone. If you live in an area with a ridiculously high cost of living, for example. My rent alone is 60% of my net income. That’s way too high, but “moving to a cheaper living situation” isn’t really possible unless I want to move somewhere really unsafe. And the really funny thing is, I have a total steal on my rent. It’s waaaay under the mean for my area.
It’s an ideal to aim for, at least. And I am now debt free and do manage to keep saving, though right now I can only save 5%.
Dear me…I’m really supposed to be using only half of our income for needs? Our mortgage alone would eat up nearly all of that, after taxes(I live in the Baltimore/DC area, so housing is really high here).
Fortunately, we are pretty happy to live without a lot of wants, so it’s ok that we don’t have have much extra money left for wants.
To RC and Ethan Gunderson: My opinion is that the minimum payments towards your student loans (the “amounts due”) fall under “needs” since you have a contractual obligation to pay them, but anything above the minimums you put towards paying off your student loans falls under “savings” since you are reducing your debt voluntarily.
Good post JD.
I just went through our own numbers and came up with the following breakdown:
Expenses 64%
– Housing 25%
– Other Needs 16%
– Wants 23%
Savings 36%
I think we are pretty happy with our balance since we are fairly young (early-to-mid 30s) and have some flexibility in our spending. We have also done well to keep our Housing costs down in our very expensive area of the country. Also we are lucky that our “Wants” are not very expensive.
Chris #39:
A special thing happens when you put 50% of your take home into savings.
It becomes your retirement plan!
For every day I work, that’s one more day sooner I can retire, as long as I am saving 1/2 my take home. Details on capital preservation, inflation, etc. really are just details. My 3%/yr was laughable in January, now people are envious.
“I’m proud of paying off my past and providing for my future, but maybe it’s time to spend a little money on today.”
How timely. Yesterday at the grocery store, I was debating whether or not to buy a $.99 bar of dark chocolate. I mean really debating. We’ve paid off all of our credit card debt and our last car payment will be mailed off next month. We have an emergency fund going. I think I went from being a careless spender to being a compulsive saver who has to evaluate everything I buy.
I’m going to lighten up just a bit, and maybe I’ll consider 30 percent for fun once we hit our goal for the emergency fund.
Well I can see I need to work on the Spending Plan. I think Less Wants and More Savings are called for.
Expenses 21%
– Housing 10%
– Other Needs 11%
– Wants 49%
Savings 30%
The charity comment is interesting. I don’t donate 10% to charity. Why don’t I? I don’t know. I guess since I grew up poor, I am focused strongly on paying off the mortgage and saving for college and retirement.
And our taxes are pretty high, and that’s charity too. I figure I’ll never get social security, so each payment is – well, charity to someone else. 10% for us is 5 mortgage payments. That’s a lot of dough.
Yuck…
83.6% Needs
14.1% Wants (Includes tithing)
2.3% Savings
No wonder it’s been so hard to save!
J.D., I think the virtue of a formula like this is that it’s not a specific allocation of “25% for housing and about 25% for all other needs”. Housing costs vary so much that it’s nice to have a formula that people in all areas and situations can use to discuss and compare their finances. Young urbanites are likely to spend more on rent, less on utilities (smaller space to heat/cool), less on transportation (no car), and more on food (higher prices) than their suburban counterparts. There are probably people out there who pay 10% for housing (such as a paid off house) but 30% in health care costs, or child support, or expenses for a disabled or elderly relative.
Most guidelines about how much you should spend on different categories are useless for many people due to their particular circumstances. By being so general, this formula can be a useful tool for anyone to use when categorizing and thinking about spending. Not everyone’s percentages will match, but it’s still useful to think about needs versus our wants, and whether needs are a manageable portion of income.
That’s a great equation, and what makes it better is your explanation of how it can’t be and doesn’t have to be strictly followed, but it is more of a suggestion. I think the 50% needs can be broken down further because I feel like some people could mix up some wants as needs, or some needs could be in savings. Plus, some people spend less on bills or groceries – would the left over money be pushed into savings or elsewhere?
I’ve been trying to stick to a similar strategy for a while now, and although it’s hard sometimes (when tuition is due, out of work, etc.), it’s a good base most of the time. I try to save more when I can, and spend about a third of my savings on short term things (vacations), and the rest on more long term goals.
41% save
34% need
25% want
I’d much rather reduce the “need” by moving into a cheaper place if I’m to up the “want”.
As for this: “Maybe your budget will be balanced, but you may become spiritually unbalanced.”
Then I guess I’m unbalanced, since I’m not interested in giving to charity.
April (#41) – This is something I’m working on too. Once we changed our spending habits, paid off all our non-mortgage debt and got on a spending plan, I realized that I’ve changed a big personal characteristic (my spending, shopping, saving habits). Now that we have our debt paid off (except the mortgage, which we are working on) have a fully funded emergency fund, and have 90% of our 2008 savings goals completed its time to lighten up a bit and spend a little more or at least save for something fun (i.e. vacation).
#46 – I think the charity/tithing issue is an interesting one and one that has been debated here on GRS before (and other finance sites that I read). We give a hefty chunk of money and time to charity but for us its a want. If we had an emergency, charitable giving (at least in the form of money) would be reduced or eliminated along with the other wants. I have trouble understanding folks who tithe even when they can’t pay the mortgage – there have been some interesting articles on this issue related to prosperity preaching.
I agree with cv in #45. I’m 26 and I’ve had a really hard time with more specific budget plans. I was staring blankly at the pearbudget spreadsheet this weekend completely frozen. I take out $400 a month for groceries and “whatever” (about 18%). That works for me. I feel no need to break it down beyond that. What I do need is to start planning for what to do with my savings once I get my EF up to snuff.
This is much easier to get my head around. It makes it easier to focus on broad goals, which is what I need right now.
I’m going to have to get this book out of the library.
50%-needs
15%-wants
35%-savings.
We are in our mid 20s right now. We are aggressively paying down some debt which accounts for about 75% of the savings total. It is possible to save more. We don’t feel stressed out about not having everything we “want”. Truth is, we don’t need a lot of stuff right now anyway. It makes our lives easier!
Overall I’m in agreement with a simplified approach, the problem lies in how and with whom (as in spouse)you determine the differences between Needs and Wants. Additionally, where do investments and retirement fall in?
JD,
The best ever cocoa mix is DAGOBA. You can find it in health food stores like Whole Foods Market or New Seasons.
________________________________________________
Now about the post:
What a great way to test your balance.
Unfortunately, we are at:
65% Needs (Mortgage is high because location (good neighborhood in Portland) is a priority for us)
28% Savings and Debt Payments
7% Wants
On the other hand, as an Engineer, I LOVE numbers, the more detailed the better 🙂 so I find this too simple.
I like the 60% solution more. http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/ASimplerWayToSaveThe60Solution.aspx
60% to Committed Expenses such as taxes, clothing, basic living expenses, insurance, charity (including tithe), and regular bills (including things like cable).
10% to Retirement.
10% to Irregular Expenses such as vacations, major repair bills, new appliances, etc.
10% to Long-Term Savings/Debt – money set aside for car purchases, home renovations, or to pay down substantial debt loads.
10% for Fun Money to be used for dining out, hobbies, indulgences, etc.
Copied from JD’s post:
https://axis-monolith.live/the-budget-toolbox-13-tools-for-building-a-better-budget/%3C/a%3E%3C/p%3E
With this method (after taxes), we are more like:
65% Needs
8% Retirement/Real Estate Investment
3.5% Irregular Expenses
16.5% Debt Payments
7% Fun
As JD always says, do what works for you.
-Charlotte
It’s a tough ratio to abide by, but I like the idea of setting up a conservative, savings-aggressive budget. Once you set that up and it works, the idea of not thinking about it and just living your life is great. Instead of feeling really guilty about every little purchase (which happens very often), this let’s you just group it in it’s right place and you’re done. No guilt.
70% Needs (50% tuition and 20% living expenses)
2% Wants
28% Savings (this is really just short term savings for future tuition debt payments, the balance all comes out to 0 by the time I graduate).
Law school tuition is ridiculously expensive ($35k/year), but I should be able to graduate debt free. I can’t wait to actually have the time to actually spend on wants, it isn’t really a choice that I only spend 2% on it, it is just simply I have no time to do things like play console games or go out regularly with 30 hours of school, 30 hours of work and a 1.5 hour commute.
I can’t wait until I can get on a more balanced budget, I am thinking something like:
30% Needs
20% Wants
50% Savings
Plex,
I know you wrote your comment 4 years ago, but I would really appreciate any tips you can give me about how you got thru law school debt-free. My son is planning on going next fall and for the life of me I don’t understand how it can be done without student loans. Thanks much.
I often return to this book when I feel like I’m on the brink of being overextended, financially. Is my house too expensive based on my income, or conversely, how much of a raise do I need to feel better about living in a house with this size mortgage? The plan makes you face your must-have expenses, and address your savings, then anything left over can be spent on wants. It’s a great book that deserves some attention, especially as people will need to take stock of their personal situations in this time of uncertainty (like direct your 20% savings to build a 6 month emergency fund).
This is a fun “budget-lite” framework to consider.
If the 403b may be considered “savings,” then my breakdown is:
Needs 36%
Wants 27%
Savings 37%
If the 403b is not included, the numbers really shift:
Needs 50%
Wants 37%
Savings 13%
Interesting. So I basically need a six figure income to fulfill the needs of a basic middle class existence while living in a low-cost part of the MidWest.
I might have to re-evaluate my conclusions. Perhaps some of my Needs would be reclassified as “wants” – though everything I consider a need now is pretty much essential and non-negotiable.
I am in a similar position to you JD, though I suspect I have a lot less income! I tend to save any left over money at the expense of wants.
However it’s worth noting that with saving and investing producing it’s own income in time, you can have a share of that as want spending as well, and increase net want spending while saving even more.
At the start it’s the most important to put the effort in and save as much as you can. Then the savings snowball can roll down the hill gaining momentum and size. 🙂
JD – One trick on cheaper movie passes is you can get them at warehouse stores like Costco! A pair of Regal movie tickets cost me $14.99, and are sometimes accepted for the new movies! With the cheaper tickets, you can even buy a large soda or candy for the price of two regular tickets 🙂
Have fun!!!
When are you “allowed” to spend your savings? I have slowly been building an emergency fund, but today I had to spend $350 to fix my car. I’ll be paying for it from my emergency fund savings. Was this a legitimate use of my “savings” for this model?
Also, how should I categorize that $350? Do I ignore it for the purposes of this model, because that money was essentially already counted as my savings contribution a few months ago?
“are you making enough room for fun?”
For me, fun and happiness is not a function of how much I spend. My happiness is more related to how I spend my time and how content I can be with the things I already have.
Hmmm, this is good for most, but how would yearly expenses be saved. In the UK, the govt gouges a tax so we can drive on the roads, it’s about £200 a year, I’d class that as a Need. Should I divide that by 12 for the monthly amount? Should I do the same for all yearly expenses? What about the holiday I have a year, a large payment just once in the year? As Richie (62) says, how would you categorize emergency fund saving – a need? Ta for the post, very thought-provoking…
The balance definitely seems to be variable. People who earn very little are obviously going to have higher needs (35% on housing alone can be tough). We probably spend about 5% on wants, and that feels like luxery to us since our income effectively tripled over the past year (including benefits) – so that 5% has tripled also.
We’re probably at first glance something like, 70% needs – but it’s mostly house, which is also savings and a want, with the remianing split 25% savings, and 5% wants. Post-tax. But we don’t WANT to spend more on wants.
Once we pay off our house, we’ll only be spending about 25% on needs. Our savings goals after that point can be met with 6% of our current income (6% of our current income goes into retirement). Our wants can be met with 5% of our current income. Total = 36% of our current income. So we’ll probably cut our income to half of the current amount I make by having me cut back to part-time, making our current budget(sans hosue) 50% needs, 12% savings, 10% wants. We will then have 28% of our new income to split between additional savings and wants. This is why our housing needs are also wants. We are considering downsizing our home to make this dream happen faster (we would need to move yet further from work, but if I only work two days a week we can do this). This is why our house is also savings.
So, it is balanced from a long-term point of view. Needs, wants, and savings are not always clear-cut seperate categories, though.
@ Dotty #14
You might want to consider “investing” in a TFSA (tax free savings account). After looking into it a bit I’ve decided to plunk down my baby emergency fund into a TFSA. Because interest above 50$ is taxed, this is a way to avoid current and future taxes (here’s the kicker) WITHOUT affecting future government options (EI, Welfare (??), Social security) From what I understand you can invest in mutual funds and still call it a TFSA. The banks are calling it the RRSP for the “rest of your life” goals. You get 5000$ a year to contribute and I don’t remember if it rolls forward. Also note it’s not tax deductable (you don’t get your taxes back) it’s tax free (you don’t pay taxes on it)
A quick google search will explain more than this nutshell approach. It’s not coming out until Jan 2009, but ING has a special prelaunch offer, you should check it out:
Hope this helps
And what if you want to ensure a secure and comfortable retirement knowing social security won’t be around… is it then ok to send 40% of your income to savings??
How does the want of free time later in fit in with the wants of today…
I don’t think I could do this formula. Rent and my gas alone is 50%. That leaves no room for student loan, cell phone, internet/cable, credit card.
It sucks living in California.
This is reasonably similar to the approach outlined in the book “My Own Two Feet” where the authors propose that about 60% of your income go to Foundation expenses (Needs), 20% to Future expenses (Savings), and 20% to Fun (Wants). I think that upping the Foundation expenses to 60% makes more sense for urban areas, like Los Angeles where I live. In fact, even 60% might not be enough. For many here 60% wouldn’t even be enough to cover their rent, let alone other foundation expenses.
I loved this article and some of the coments. I have always made myself a budget but sometimes forget the fun stuff and didn’t budget for it and so went over my budget. I will now add that in, everyone needs some fun time or its not worth working and saving. If you don’t have time or money to do things you enjoy, you don’t enjoy life.
JD, FINALLY! HOORRRAAAYYY!! It’s about time you gave us a blog which is actually a USEFUL tool! Sorry, but I’m not a big fan of miserly tips like “how to save 29 cents…”, I would much rather target big ticket items first… requires less effort!
So kudos to this great find. I have been using a detailed budget for over 10 years and have come to the same conclusion, KEEP IT SIMPLE!! Here’s my breakdown. I see I need to save more!
18% save (7% 401k, 11% short+long term)
51% need (21% mortgage, ins, taxes, 12% auto)
19% want (9% vacation, 10% gifts, cash, dining)
12% other (trying to move this to savings)
My future target savings for 2009 is 25-30% net, or about 3 months equivalent monthly expenses. This will create a 6-month emergency fund in 2 years time.
Conrad
I’ve been working towards a variation of T Harv Eker’s that goes like this:
50% Needs
10% Financial Freedom
10% Long-term Savings (cars, weddings, Xmas)
10% Tithing
5% Education
15% Fun money
Looking at it through the Money Plan, that sounds like FF, tithing, and education could be taken as ‘investment in the future’/savings, and LTS, and fun are Wants. I guess this is really up to the individual – what is a need and a want.
He also recommends using jars at home – put $$$ in, or the checkbook. Make it visual, and it’s easier to keep in mind.
Of course, I don’t think there are any hard and fast rules. It’s a process we’re working on, and habits we’re developing.
IMO this is a solid, time tested approach. Here’s a link to a balanced money summary that provides more details and guidelines. There’s also a free excel spreadsheet with decent instructions and summary graphs. http://www.mdmproofing.com/iym/BMF.shtml
I am 28 years old and currently working for a company. I make 595 dollars (another country; average rent is 357 dollars) a month. I have opened up a retirement month account and save as much as possible. Now my savings goes toward our wedding but once we finish with it I would like to save for a Europe trip. I am thinking about this balanced money formula lately and how it can be incorporated to “small” incomes. Can you help?
I think the point of this formula is that it represents how money can be used to fulfill its role in our lives – to provide us with our basic needs, to plan for our future and to enjoy ourselves. I think the ratio is recommended for creating a happy balance. Maybe you can’t meet that now, maybe you had a big ‘want’ years ago for a really nice house and now you have a ‘need’ now to pay the mortgage on it. But basically, it helps me remember than money does buy fun and its not a sin to spend on things we like. I’ve had periods of time when rent alone was 70% of my income and no, it was not a happy time for me. Right now I do live on half my income and yes, I feel wealthy. Even crises don’t phases me too much. It is a peaceful reassurance to know that you can manage a crisis by cutting back savings and needs for a year and be done with it than to spin into panic because you’re already stretched to capacity. It also should reassure people who are stretched that they won’t always be able to save and save and spend 0% of their needs – it’s like a starvation diet that will be inevitably broken. Balance gives us choices, and that’s always good.
I think it can get a bit tricky to figure out where the line is between Needs and Wants. When I ran the numbers for our household, I put housing expenses, groceries, transportation, clothing, health care, personal care, and office supplies under Needs, while restaurant meals, entertainment, cat care, charitable giving, and gifts fell under Wants. However, I know that some of the things I’ve lumped in under Needs are really Wants. For example, the gas we use for commuting is a need, but not the gas we use for driving to a concert or to visit friends. We need to own some clothes, but not every piece of new clothing we buy is something we absolutely needed. Much of the money we spent on home maintenance is necessary (to keep the roof over our heads), but some of it is optional (like refinishing the basement). So I think my estimate of 43 percent for Needs is a little high, while my 12 percent for Wants is low. According to Warren’s formula, we’re spending far too little on Wants, but we don’t feel deprived. So I think it’s useful to remember that the lines between these categories are a bit fuzzy.
One question: how can you use your savings?
If, for example, I decide to buy a car at the end of the year using my savings, in which category does this expense go? Should it be in wants, because I don´t necessarily need it asI allready have one? Or could it be considered a saving itself, as i´m investing in a new car. Or, even more, it could be considered a nees, as i will sell the old car and I need to have a car. Any advice?
Also, just to be sure, the holidays are considered wants, right?
Tx!
Yea I think you hit home with this one for me too. I hate a budget and when I’ve set one before I can never discipline myself to keep it up.
Thanks for finding this balance formula I think I’ll have to start doing that.
Okay, I’m a bit of cynic. Currently as guesstimate we spend about 20% on needs, 15% on wants and 65% in savings.
Do we need to save that aggressively? I would say no, but I guess I don’t see how spending more on housing or vehicles would improve my life. My crew enjoys cheap recreation mostly (DH is a golfer 😉 the exception) We travel and do lots of fun stuff. I get great peace of mind in knowing I can afford to eat out or get a latte anytime I feel like it. That’s different than I choose to do it that often. It’s more fun and more of a treat when I act like it’s a treat, not a birthright.
I also don’t think that saving 20% is going to give my family (or most other families) enough savings to retire, replace cars, and be real finicial help to college aged children. I am personally on the fence that a 100% parent-paid college expereience is in young persons best interest. I know a ton of student loans aren’t either.
I have a question: When you, or Elizabeth Warren, say – save 20% of the money out of your paycheck, are you then excluding the 401(k) contribution which has already been subtracted from your pay and not reflecting in your actual net pay?
Just wanted a clarification.
What if you are retired already? Living in an expensive area? (CA) How much of the 20% savings is budgeted for retirement that I could adjust for? thanks!
Thank you for this EZ Money Formula Review! I think EZ Money Formula is a decent opportunity. I appreciate your details.
I find the categorization to be murky in some cases. Some people have a car payment, and other people paid cash and are putting aside a car-payment-like amount every month to buy another car later. Do we say a car payment is a need but a “car pseudopayment” is savings?
Similarly, if your parent paid for your education and you in turn put aside an amount each month that resembles a student loan payment, for the purpose of funding your kids’ higher education, did we suddenly move from needs to savings? Just because you are making a “pseudopayment” rather than an actual one?
And finally, are whole life premiums needs or part needs and part savings?
This is a great post and i can see it helping a lot of people control their financial situation. Its good to be reminded of the basics once in while.
Whether anyone should let the “balanced money formula get out of balance” depends on individual goals. At one point we were saving north of 80% of our after-tax income. According to the formula, that is way, way out of balance.
But our “out of balance” equation allowed us to leave our full-time jobs at the age of 38 and travel the world continuously since 2010.
We feel much more balanced these days with our equally unbalanced life formula of minimal work and maximum travel. 🙂
I think if you’re doing things right you should be knocking these numbers out of balance. For instance, if you get a raise, are you going to spend more to keep these proportions in tact or are you going to bump up the savings?
There are also going to be years where our savings rate will take a temporary hit — wedding, first home, first kid, serious illness, job loss, etc. I think true balance making the most of good savings years and accepting the lean savings years, not necessarily maintaining the status quo year after year.
I definitely had some lean years when I went back to school, but it definitely made my life richer in other ways.
We are way out of balance right now. By choice. We chose to go from two incomes to one income. Our needs percentage went from less than 50% to um… significantly more. We managed to keep our savings percentage the same when we reduced incomes however the actual amount is less because it is 20% of less money.
I do want to add that by intentionally keeping our NEEDS category at much less than 50% when we decided we wanted a stay home parent the math worked out wonderfully!
Oh savings…so many definitions for savings. I think it’s light for most people here. Not counting retirement, my savings of net income has been 40-60% for the last few years (minus 6 months when I wasn’t earning as much). I’m aiming to have my needs (which I’ll define here as my recurring basic expenses: food, utilities, transportation, and fixed expenses)…I’m aiming to have my needs require only 20% of my net income, 10% to extras (like gifts and entertainment), and 70% to savings.
Here’s where I get a little confused with the lack of clarification when it comes to this topic. Right now I’m saving $3000 for a vacation next year. Is it savings? I’ll be spending it within 6 months. Maybe short term saving? Or ‘deferred entertainment spending’. Is it ‘saving’ if you’re saving it with the intent to spend it in a short amount of time?
I think it’s more important to focus on the ability to save, rather than the actual saving part (except when you’re talking about long-term savings). For me the only long term savings I’m focused on right now is retirement. Anything else, I am saving for something specific…whether it’s 6 months from now or 2 years from now.
My feeling is as long as you’re saving adequately for retirement, you have a well-funded efund, and your needs and monthly commitments do not take up a large portion of your income, maybe it’s not necessary to put aside a large amount of savings. In this respect, I can see how the balanced money formula would come in handy. But they need to clarify what the saving is for…long-term or short-term (it’s been a while since I read the book, so they migh have done this).
I just don’t see too much of a difference between someone who spends the same amount of money monthly on entertainment, and myself who is saving the same amount of money for entertainment in the future. I do agree though that it’s always a good idea to have an automated trickle of savings coming in each month (even with an efund). I just don’t necessarily think it needs to be waterfall unless your goals require that.
I’m in the Gail Vaz-Oxlade camp where goals like vacations, cars, furniture, etc aren’t “savings” but are “deferred spending” in my budget. I don’t count them as part of my savings or my net worth.
If other people want to consider them part of their savings rates, that’s fine for them. But the more your savings has to cover, the higher your savings rate has to be. I’m skeptical when people brag about their high savings rates for this reason.
What always confused me about this methodology is how you really track this kind of thing when there are things that cross categories. For example, is paying off a small loan payment or a credit card every month a need or savings? I consider it savings, since the payment goes away eventually, and then you can put the same amount toward savings. Is my internet bill a need or a want? I consider it a need because I use it to work from home occasionally.
The reason I ask is that my household is way out of balance right now, so we kind of have to stick to a traditional budget to try and “catch up.” High rent in our area and lower income means that our needs are at 77%, so we’ve got savings at 15% and wants at 7%. But it’s helped us realize that so many things in life are free, it hasn’t felt like much of a sacrifice to be this way. We’re working on increasing our income, and maybe we’ll increase our wants budget, but then again maybe not. We work full time, come home, spend time together and play free games or watch Netflix (both captured by that 7%). It honestly baffles me at this point how anyone could spend 30% on wants after having the level of income it would require to get to this formula.
I don’t think you can consider paying money from a credit card bill as “savings.” Savings is meant to indicate assets that will come into play during your retirement. What did you spend the underlying credit card amount on? I think generally, many credit card purchases are wants, unless you are using them to pay for rent/ electric. Once you pay off your credit cards and are SAVING, that will count as savings.
If you need a cell phone or the internet for work, you can call it a need
As for 30% wants, for me, when I purchased a new car, that went to “wants” because I had a working albeit VERY old car at the time and I wanted a car that was more reliable. Clothing, new furniture, a new computer to replace a VERY out-dated computer, Christmas presents, vacations, flowers for the garden, restaurants, monthly date night, new cell phones, exercise classes, paying off debt–all of that I consider as wants. (I have never used a credit card to pay for things like groceries, rent, utilities, and I consider my college education as a want and not a need, even if I used it to get a better job). I am very tight with the word “need” because everything in the “wants” category indicates a choice. That philosophy is very helpful in budgeting and helps me appreciate more of the choices I am making
I think that the baseline balanced money formula is different for everyone depending on what they are trying to achieve so I wouldn’t necessarily say you are out of balance.
You need to determine what is right for you and set up your own baseline for the different phases of life you are in. You are only out of balance if you aren’t sticking to your individual goals.
“Once your money is in balance, you can stop worrying about it. Managing your money becomes automatic.” I can’t agree more with that.
I never actually budget, too much work. I just pay myself first, and then work with what is left. It has worked for me and does not involve much more thought than that.
Maybe Im just a simple mind
Andrew
SHM
Good Article Linda !
The balanced formula has changed over time for me. I started with paying myself first 10 %. But as I got serious about being financially independent my saving and investing percentage gradually increased. Now, I pay myself first 50% of the income. This happen automatically. I DO NOT LIKE BUDGETING.
Over the years I also increased by salary significantly by extra training, continuous reading with new technology, and changing a couple of jobs. , I am a software developer based on Microsoft Technology.
I was able to increase my salary and I did not raise my lifestyle that much. Hence, I can save and invest 50% of my salary. This will stay until I reach my goal. My friends have a big lifestyle than I do, but to me financial freedom is much important than fancy and uncertain lifestyle.
Seems to me the model is based on how to handle current income. I would suggest always adhering to the minimum of 20% and if you want to increase your expenditures on “wants” then consider what you can do based upon your current amount of savings (existing assets rather than incoming money), but seems dangerous to get out of the habit of “feeding the pig”.
I generally agree with this. The Balanced Money Formula gives you a good guideline. I also think it’s totally ok to discard it if your income is well above average or well below average. That means you can have a lot of wants but still be able to save more. If your income is low, then saving 20% isn’t realistic. However, if your income is low, the Balanced Money Formula is telling you that you need to focus on growing your income so you can get to a 20% savings rate.
This makes sense, but I would add up a percentage for the tithes, it is also good to share. I love it when 10% of my income grows because it simply means that you can share more and of course you already have more.
Ah, but do you tithe with net or gross income? Not you in particular — sorry if that’s too personal. I just mean that most people I know who tithe do so with before tax dollars but the BMF is after tax. (In Canada, it makes a big difference!)
I’ve seen some budget models that work with net income and include taxes as expenses.
I love Elizabeth Warren’s stuff (Two Income Trap remains one of my favorites).
Though, I’ve always found the Wants/Needs/Savings to be less about actual percentages of each category and more a conceptual thought change to highlight that spending we have falls into categories of things we MUST do, things we WANT to spend on but don’t NEED to, and things that up the net worth.
To correctly apply percentages, you MUST know/do two things: (1) Exactly what you spend your money on (this alone is a mind trip for so many people, bless you Mint/YNAB), and (2) you must actively parse all $$ into a NEED / WANT / SAVING (yet another mind trip for so many people).
Once you understand that, I see how the whole formula can easily get “out of balance” but still be considered “doing it right.” Most of the value comes through going through the exercise of figuring out what you spend your money on and what category it is in.
I am also curious how others handle overlapping categories.
For example, my wife has ~104k student debt left. We pay $2500 a month towards this. The actual required payment is $1000 or so (something like that). Do I consider $1000 to be the NEED and the other $1500 savings? Is the $1500 a want? OR, do I consider that given it is debt, it breaks down to ~$600 interest and $1900 principal, do I call the $600 a NEED and the $1900 savings?
Further example, my wife gets a Cash Balance Plan equal to 10% of her gross. We cannot access this money (not until old age, though we can roll over when she quits) and it doesn’t show as gross on a paycheck. 10% is huge, do we consider this towards the savings percentage? Do we consider it minus 30% tax towards savings?
Consider as well, a rent/mortgage payment. We pay $1250 for rent, this is clearly a NEED for % purposes. If we get a Mortgage, an 80/10/10 for the house we want/need would be ~$2500 PITI. Of that $2500, figure what, $1200 or so counts towards principal (maybe less), is that Principal savings?? Or is it a need?
Anyways… I feel like games can be played with the “savings” category… and when you start counting things like cash balance payments, mortgage principal, loan payment principal, 401k matches… etc., then some pretty high numbers on the savings relative to “net pay” can be obtained!
Thoughts?
Wow, there are a lot of thoughts on this! I am kinda surprised.
I think it might be helpful to keep the context of the creation of the formula in mind. I read the book. Elizabeth Warren was an academic professor who specialized in Bankruptcy Law and its effects on society. After years of research she wrote her first popular book, The Two Income Trap, and became an activist for those facing bankruptcy. In this book, she explains that her research revealed a great many middle class American’s felt forced into becoming a dual income family primarily to earn enough money to get homes in better school districts in order to support their children. She felt if it weren’t for this competition for school districts raising prices, one of the spouses could have stayed home.
In the process of becoming an activist, she had many people approach her and thank her for trying to change policy but ask what they could do themselves to be in a better situation financially. Then came the book, All Your Worth, where she introduced the Balanced Money Formula. She said she wrote it as a book she could point to and tell people this is how you can avoid or get out of your bad situation.
In the book she discusses several things that led to the formula. Initially, most people suspected that these bankruptcy’s were from spendthrifts that were clueless. Research showed a huge portion where in bankruptcy for medical bills. Some were hopeless spendthrifts. But there was another fairly large segment that were reasonable middleclass people who made good money, had budgets and didn’t blow money on a lot of frivolities. This group ended up being the same people she wrote about in The Two Income Trap. She found they felt they HAD to get into really nice neighborhoods for their children’s schooling and housing was taking a very large percentage of their income. It was middle class people whose NEEDS category was simply too high for their income but they weren’t overspending on frivolities. So she was focused on helping this group realize their self-imposed peril.
I am not sure a large segment of the GRS community is her target audience. It is kinda like reading or listening to Dave Ramsey. He is going after a crowd that needs triage and a drill-sergeant to get things done. I love the guy and he has done a lot of good. But I am not his target audience and don’t need to be spoon fed watered down concepts or yelled at. The balanced money formula is an excellent devise that could help a lot of people realize how out of whack there needs and wants are, but for the big savers (much of GRS) it may not be as profound a tool. Unless it helps you live a little.
I still like it. Like Dave Ramsey it is useful. Note in the article, JD didn’t really “get” the BMF, until he was at a different stage of personal finance. Then he re-discovered it, and really liked it.
I’ve never budgeted either because from an early-retirement perspective the larger the savings %, the faster you get there. Is financial freedom a want or a need? For me it was both so I stayed in balance with savings ramping from 60% as a new hire to over 90% after two decades of raises on a flat standard of living. After crossing the finish line I found out that I don’t need or want much of what money can buy, besides financial freedom, so my savings rate is still over 80%.
I think you have to watch out – you can have something looming that can throw the balance more than just “a little bit off.” And I am not talking about a health issue here; I am talking about something that could be staring you right in the face.
We were at one time very balanced, even as a single-income family with two kids – over 25% going to savings if you count our retirement plan. But we were both driving 13+ year old cars. And then we decided we needed to replace both in the span of about a year. And my wife and I are both car people, and if you know anything about our type, just any car will not do. So we got a bit out of whack in the last couple of years. It’s not like we went crazy, either – we just didn’t shop for something nondescript. Do we regret it? No…we’re still meeting our main goals, and we’re living by our belief that “life’s too short to drive a boring car.” But we’re not in balance, and probably won’t be for years now.
Sidebar – we have 10% carved out of our budget for giving that we do not compromise. This is not an easy thing, but if you are church-goers, it keeps your mind on Who gave it all to you in the first place. And if you are not, I expect it would help keep some perspective on your blessings vs. the needs of others.
It should be noted that need and want in the balanced money formula have specific definitions. A need is something you have to keep paying even if you lose your job. A want is something you could cut out if you lost your job.
Also you are “allowed” more savings and less need without being out of balance.
Depending upon the individuals financial status the formula for money savings can go fruitful. We cannot expect any great change instantly but can show the results after a span of time. There can be a different formula for different family member size. Good Post!! Thanks for sharing.
When we think about our balance formula, we add another category – Investing.
Some people include that in savings, but we have budgeted to think of savings as “future spending” (buying a car, buying a house, paying for vacation in cash) and then the investing category to be just that – Roth IRA, Index Funds, etc.
We have created a formula that works for us 🙂
Thank you to this community for the encouragement!
My formula is about 35% debt repayment, 35% variable spending, and 30% fixed costs. As soon as the debt is gone that portion will go to savings instead. For now my only savings are pretax pension contributions so my ratios are based on take home pay.