The Formula to a Balanced Budget

Developing a feasible, responsible budget is one of the cornerstones of good money management. Most budgets don’t work right away, usually because people underestimate their expenses or don’t keep an accurate record of their spending, and it’s easy to become discouraged. Finding a strategy that works for you is going to be the key to your success.

Budgets don’t have to be complicated. The balanced money formula offers a simple and effective template which you can use to organize your finances.

The Basics

The balanced money formula was introduced by Elizabeth Warren and Amelia Tyagi in their book, “All Your Worth: The Ultimate Money Plan.” The authors’ goal was to provide a budgeting system that would help people achieve their financial goals while requiring a minimum amount of work to maintain.

The idea is to divide your net income (after taxes) into three basic categories:

 Needs  Wants  Savings
 Housing  Cable TV  Retirement Accounts
 Utilities  Cellphones  Emergency Savings
 Healthcare  Books/Magazines  Credit Debt
 Insurance  Vacations
 Transportation  Bars/Restaurants
 Groceries  
 Clothing    

It works like this: 50 percent of your monthly budget goes to needs, 30 percent into wants and 20 percent into savings. That’s it.

The beauty of the program lies in it’s simplicity. It establishes a general framework of where your money should be going each month while still allowing you to remain financially flexible.

In their book, Warren and Tyagi wrote, “Once your money is in balance, you can stop worrying about it. Managing your money becomes automatic. And so it moves into the background of your life where it belongs.”

Make Your Budget Work for You

The main criticism of the balanced money formula is that it doesn’t require you to save enough.

Many people believe that spending 30 percent of your budget for things you want today compared to 20 percent for your future will leave you in bad shape when it’s time to retire. A lot of this depends on when you are starting the program. The older you are, the more you will need to allocate toward savings in order to meet your retirement goals.

The same principle also applies if you owe a large amount of credit card debt. Most of the time, it makes more sense to pay off your high-interest loans before you get serious about saving and investing. You’ll still want to maintain a reasonable amount in your emergency fund.

In a recent survey by American Consumer Credit Counseling, three quarters of the respondents felt that they were inadequately prepared for retirement. About a third weren’t contributing anything to a retirement account. Even if you don’t believe the balanced money formula requires you to put enough into the savings category, you can always add more. Saving something will always be better than saving nothing at all.

There’s also more than one way to increase the amount you’re saving each month. There’s always the tried and true method of cutting back on unnecessary spending. What most people don’t consider is figuring out a way to raise their earnings, either through improving marketable skills or finding a new career altogether. In the end, some combination of the two is likely going to be your best approach to living comfortably now while still setting yourself up for retirement down the road.

Remember that sticking to a budget doesn’t mean you can’t have fun. Properly managing your money is all about living within your means. As Warren and Tyagi put it in their book, “If you can’t afford fun, you can’t afford your life.”

Photo courtesy kenteegardin