Budgeting that works: The Balanced Money Formula

The Balanced Money Formula was suggested by Elizabeth Warren and Amelia Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan . I have already mentioned that budgets don’t do much for me – this is not a budget. The Balanced Money Formula is a guideline for exactly ‘what it says on the tin’ – for achieving financial balance that will allow you to live a life of abundance and also ensure that you save towards your dreams and your future.  Applying the Formula assumes that you know your net income (income after tax) and have detailed, itemised knowledge of your expenditure.

Warren and Tyagi’s Balanced Money Formula consists of three elements: needs, wants and savings. ‘Need’ is everything that you absolutely have to pay and will include shelter, facilities, cars and insurance, food and basic clothing. ‘Want’ is everything above the basic needs that we have in our lives like eating out, going out, holidays etc. This category can include the things that you can cut out but this will cause temporary discomfort. Savings includes also ‘negative wealth’ repayment till it is gone. Three broad guidelines bring these in balance:

You should spend no more than 50% of your net income on needs and ideally spending in this category should be kept under 35%.

Up to 30% of your net income can be spent on wants.

No less than 20% of your income should be put in savings.

Simple and doable! As the Warren and Tyagi and American, my UK and generally European based readers ought to recognise that in the US a proportion of the 20% savings is pension contributions. In the UK and in most European countries pension contributions are made in company pension schemes before tax. If you can save 20% of your net income, please do; my estimate is that 10% would be enough.

Our budgeting is for the time being slightly reversed. About 45% of our net monthly income goes on ‘needs’, 20% on ‘wants’ (these are all the things we can cut if needed but it will hurt) and 35% on savings (this includes ‘negative wealth’ repayments).  Long term, these proportions will have to change.  More importantly, everything that does not go on needs and wants currently goes into savings.

What happens when your spending does not match these proportions? There are choices to be made. Spending on needs over 50% of your income for long period of time may not be sustainable. Are there options that will lead to reduction in needs? Spending very little or nothing on ‘wants’ is not sustainable either – is there a way to increase this? Saving less than 10% may mean a future full of uncertainty – could this be increased?

2 thoughts on “Budgeting that works: The Balanced Money Formula”

  1. Thank you for all your recent posts on budgeting Maria. I have spent the last few days with pen & paper, number-crunching and would like to offer the following personal observations. In my experience, the higher your income, the easier it is to follow comfortable budget percentages eg two years ago, our household income was 30K, so just above the UK average. Our budget was, as you described, like a pair of comfy old shoes, easy to wear and could be worn for a long time with no discomfort. Our percentages were 66% on needs & debts/savings and 33% on wants. Fast forward two years and our household income is 20K and our budget has turned into those 4 inch stilletoes that are two sizes too small, ouch. Our current percentages are 90% on needs & debts/savings and 10% on wants. The sticking point for us is our housing costs, a whopping 55% is spent on our housing needs. So investigating options, well these are not good:
    1. Downsize – not really feasible, we (3 adults, one of whom is classed as disabled, and 1 16-year old) live in a small 3-bed terrace.
    2. Private rent – not really sensible, private rents are the same cost as our mortgage.
    3. Social rent – we could I suppose join the waiting list for X years.
    4. Re-negotiate our mortgage payments – not my first choice, my eyes water when I look at the amount of money we have already paid out in interest and would prefer never to give the banks another penny.
    5. Move house to a cheaper part of the country – we have that choice, what happens if you live in the cheapest part of the country, a bit like our dilemma with downsizing.
    So a drop of 1/3 in household income across the median point took one family from a comfortable budget to a budget that pinches and the cost of housing is forcing a whole host of unpleasant choices. Not good, Annex.

  2. Anne, your honest and open post illustrates very well why I don’t do budgets but budgeting. Situations change – sometimes for better, sometimes for worse. Our budgeting ought to be changing with it. As to the proportions set out by the Balanced Money Formula they are there for orientation; to support you in making choices and working on options.

    You said that the situation feels uncomfortable? If I were you I’ll be asking myself about timelines – I can walk half a mile in high stiletos but won’t last a whole mile. Can you foresee any easing off? How long can you last in this situation? Is it affecting the ones around you and how?

    I also noticed that all options you have sketched are about reducing your housing costs. Any chance it may be possible to increase your income (which will change the proportions, of course)? A small increase can have very large effect. Can OH get a second job? Is there anything you can do from home? Can you gain different qualifications? Can you work when OH is at home so you share care and work?

    Take care and thinking about you!

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