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?