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Simplify Your Finances With The Balanced Money Formula

by Alonzo on January 19, 2012

Control your spending or it will control you.

That’s the theory behind budgeting, but it can be hard figuring out exactly how much of our money should go where.

How much should we spend on groceries?

What should we save for retirement?

Should we build an emergency fund or pay down credit card debt?

Elizabeth Warren, driving force behind the new US Consumer Protection Agency, and Amelia Warren Tyagi have a simple solution that makes budgeting easier.

The 50 – 30 – 20 Balanced Money Formula, described in their book All Your Worth: The Ultimate Lifetime Money Plan suggests that fifty percent of your take home pay should be used to cover absolute necessities like food, shelter, and transportation.

Thirty percent should be directed toward your “wants”, those things that are nice to have but not absolutely essential. Cable television, your smart phone, and dining out are a few examples that come to mind.

Finally, twenty percent should be dedicated to paying off debts and building savings.

The Balanced Money Formula

Fifty Percent (50%): Basic Necessities

Rent / Mortgage Transportation Groceries
Health Insurance Utilities Basic Clothing

Thirty Percent (30%): Wants

Dining Out Cable TV Smart Phone
Designer Fashions New Car Vacations

Twenty Percent (20%): Debt Repayment and Savings

Student Loans Credit Card Debt Emergency Fund
College Fund Retirement Account

Forget the “Latte Factor,” Focus On The Big Savings

Restricting your needs to 50% of your after take home pay frees up money for “wants” and “savings.” Warren and Tyagi understand that this may take work and time to achieve, but they also point out that a relatively few moves can result in huge savings. Think “big wins.”

Refinancing a mortgage to take advantage of all-time low interest rates, for instance, could save you thousands of dollars a year. Calling around to lower auto and homeowner’s insurance rates could save you hundreds.

Living Like A Miser Is No Way To Live

I love that the Balanced Money Formula recognizes that living like a miser is a recipe for disaster. Of course you want to be responsible, but all “work and no play” creates a mindset of deprivation. Not the way most of us want to live. Instead, work hard to pay your bills, pay down debt, and save for tomorrow. But have some fun as well.

Which brings me to the next point. Because 30% of your take home pay is dedicated to your “wants”, the Balanced Money Formula requires you to prioritize. You can’t have it all. Restricting the money you can spend on “wants” forces you to choose only those things that bring you the most enjoyment.

Enchanted by the prospects of yearly visits to the Caribbean or Europe? That might mean cutting back on cable TV, designer fashion, and other things that bring you less satisfaction. Enjoy eating out? Perhaps you’ll have to cut back on the shopping trips, concerts, and hobbies. The 50-30-20 budget allows you to have fun while still remaining responsible with your money.

Would The Balance Money Formula Work For You?

Of course such a plan won’t work for everyone. With sky-high unemployment, enormous debt levels, and explosive health care costs, many people are struggling just to put food on the table. Their “needs” category could easily consume their entire paycheck.

But for people with a decent salary, the 50-30-20 Balanced Money Formula is worth a look.

What about you? How do you control and prioritize your spending?

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