50/30/20 ratio? "All Your Worth" book

[mariec99]

Is anyone else using the 50/30/20 budget method from the book All Your Worth by Elizabeth Warren and Amelia Warren Tyagi?

How is it working?

[yellow heel]

How does this system work?

[pearlieq]

Is that the one that's 50% needs, 30% wants, and 20% savings?

I'll have to check my numbers to see if I conform. It's an interesting concept.

[lrjohnson]

I'm not close. I'm somewhere like 50% savings, 5-10% wants, and 40-45% needs.

[Broken Arrow]

Originally Posted by lrjohnson

I'm not close. I'm somewhere like 50% savings, 5-10% wants, and 40-45% needs.

Hehe, your ratios are better than the one suggested by the author.

[Ima saver]

You do great with savings, lrjohnson! I am jealous!

[poundwise]

I give this concept a great big shoulder shrug.

It reminds me of oversimplied fad diets.

[PrincessPerky]

I think sometimes having a simplified system is helpful..after all I cannot keep track of billions of little calorie notes..sorry, I follow the oldest diet..4 food groups

But as far as the system.. I think it isn't to terrible, no worse than 'cut back on calories, increase excersize) not that I am anywhere close to it, more like 95% 'needs' 4.9% 'wants' and .1% saving (hey we are working on it!)

[DivaJen]

I can't remember - how does pre-tax, retirement savings work in relation to the ratio? Is the ratio for take-home pay, or gross earnings?

I remember looking at our ratios and we were a bit heavy on the needs, but still doing pretty well on the savings.

[mariec99]

I can't remember - how does pre-tax, retirement savings work in relation to the ratio? Is the ratio for take-home pay, or gross earnings?

That's one of the thing the book makes confusing. She talks about using after tax take home income in the Must Have's section and has you add any employer paid medical premiums back to your salary. But, in the Savings section she talks about retirement savings as though it was an after tax item - and I am not sure whether or not to add my retirement account contributions back into my salary (for ratio calculation) or not.

And if you have "better" ratios, fine - the 50-30-20 is just a goal to shoot for if you aren't there yet. The 50% was selected as a goal because as the author states, usually unemployment pays about half of what your income was. So, if you can get your Must Haves to 50% or under then you can still make do if you lose your job.

The author stresses balance rather than deprivation and that's why I liked her approach.

[sweeps]

How do the authors differentiate between needs and wants?

[mariec99]

Need are thing that you need for health, safety and dignity and things you are contractually obligated to pay and could not get out of even if you lost your job: Basic food, mortgage/rent, medicine, car insurance, health insurance, public service, cell phone contract, student loan payments (although, if you are laid off or experience a crisis you may be able to suspend payments or only pay interest until the situation improves), life insurance, etc.

Wants/fun things are things that if some crisis happened you could give up or cut back on drastically: clothing, cable tv, entertainment, eating out, haircuts, lawn service, non-emergency home repair, etc.

Saving items include everything you are doing to work toward your future including (and this may be "controversial") paying off credit card debt, emergency savings, retirement savings, etc.

[TBH]

It's interesting that student loan debt repayment is a "need" while credit card repayment is "savings". I don't disagree, but I think it's an interesting breakdown.

[TBH]

A similar concept is the 60% solution. I'm not sure where it comes from but I saw it first on MSN Money.

I think it's like this:

60% fixed living expenses (inc. taxes)
10% retirement savings
10% long term savings (college, major purchases, etc)
10% short term savings (vacations, home improvements, emergencies, etc)
10% fun money

I really like this idea but don't really know where I stand on it. We're certainly not saving 30% of our income, though.

[mariec99]

It's interesting that student loan debt repayment is a "need" while credit card repayment is "savings". I don't disagree, but I think it's an interesting breakdown.

I agree with your feeling -- Elizabeth Warren (one of the authors) teaches at Harvard and goes to congress all the time to testify about what she considers the evil credit card companies. She is rabidly anti-credit card, anti-Home equity loan. She also ends the book with a section on paying off mortgages (no special strategy - just the benefits of it). She considers paying off any credit cards to be at least as important as regular saving

I was really tempted to stick my student loan in the savings portion simply because it can be deferred or "interest only" handled in a crisis. But leaving it there makes me put more into the savings column...and in a crisis I'd still have the deferment "safety net"

[autoxer]

When I first saw the ratios, It didn't seem realistic, but now that I plugged my numbers into the worksheet, it makes a lot more sense & shows how imbalanced I am. Mine came out to 36% needs, 16% savings & 48% wants. Then occasionally I'll switch to 36% needs, 40% savings & 24% wants. Maybe if I had some balance, I wouldn't go from one extreme to the other so quickly.

The authors are as anti-credit cards as Dave Ramsey. While I don't agree with that completely, I think their CASH system for fun money is very practical for me. I started doing that a few months ago, before I read the book, but now it has given me some ideas to simplify it for me.