Balanced Money Formula – According to Elizabeth Warren and Amelia Tyagi
I'm In Debt
- Posted:
4/3/2009
In their book,
All Your Worth: The Ultimate Lifetime Money Plan, Elizabeth Warren and Amelia Tyagi discuss an alternative to a traditional budget. Many people have trouble creating and sticking to a budget, so having an alternative method of tracking your finances and getting yourself on track is useful.
The Balanced Money Formula
The authors call their alternative method the “balanced money formula”, which includes percentages for NEEDS, SAVINGS, and WANTS. It's based on your income after taxes (net income) and that ideally you would spend no more than 50% of your paycheck on your NEEDS – with a goal of keeping all necessities under 35% of your net income. Whatever money is left after you accomplish this, at least 20% of it should be devoted to SAVING, and 30% is spent on WANTS.
Here’s what it looks like:
So in a budget, you would have many, many categories of every time of spending, every credit card account, every necessity, want, savings plan. With the “balanced money formula” you have just three categories to keep track of. Instead of tracking it down to the last penny, you have percentages of your income to worry about. It's like the “big picture” instead of the penny-watching method that most budgets rely on.
In the balanced money formula, your needs would be things you must pay no matter what happens – your housing and food, utilities, insurance and cost to commute to and from work.
Your wants are everything that isn't saving or needs – cable television, clothes that are beyond the basic need of a few outfits to cover yourself, restaurant and take out meals, entertainment, new furniture when you have usable furniture, etc.
Savings is everything you put into your deposit accounts, retirement, or investments.
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. The authors of this book are more interested in changing behaviors that lead to financial problems, and in fixing the big stuff than they are in knowing where every last penny is spent. They also are firm believers that you must have time and money to enjoy life while you're getting finances in order – hence the formula that includes 30% of your net income for entertainment and wants.
If you've tried budgets and they don't work, maybe take this book out of the library and see if you can benefit from an alternative method instead.
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