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.

[rarnold_416]

Hi everyone, I found this forum and wanted to post some stuff that I thought may help some of you if you still had questions. I'm very much a fan of this book, and I've been following the advice for sometime. I'm 22 years old, have started a 401(k), and although my ratio isn't exactly where it should be, it definitely makes it very easy for me to regulate my spending and monitor where my money is being spent.

I ratio is something to the effect of 60/24/16. Albeit it's not perfect, I'll soon have the rest of my debts paid off, and then things will work themselves out. I treat a few of the rules a little differently, for example, I have a cell phone, and that bill is roughly $90 a month. I take $50 from my needs, $20 from my wants, and that pays my cell phone bill. I justify doing it this way because it frees up a little bit of my needs money which lowers my need percentage, but it also draws a small amount from my wants, and this in turn motivates me to work towards lowering my overall spending, so that I can alter my numbers somewhat in the future, move my numbers closer to 50/30/20, and at some point in the near future, have more money to put in my pocket for my "wants" spending.

As far as retirement spending, health benefits, and credit card bills, this is what I found.

Retirement plans are considered as follows. If you make a contribution, you should count it towards your savings. If your employer makes a contribution, count it toward your savings. The women say to do this because even though it doesn't come from your income, or count against it, it does count toward your lifetime savings, and so it should be accounted for there.

Premiums for health benefitsthat are subtracted from your income should be included in your total income, as this is one place where you could cut spending in a dire situation. For example, if you have $25 deducted from your paycheck each cycle for your health benefits, and you find that your "needs" spending is over 60% of your spending, it's plausible to assume that you could reduce your health spending in such a way to lower your payroll deduction to maybe $15 each cycle. Although this makes a minimal reduction to your "needs" spending, any reduction counts. There is a place in the book that talks about "getting serious" in order to reduce your needs spending, and it mentions healthcare as a place to make cuts until you get things in order. This is the reason that your healthcare costs (as related to employer taxes) are included in your income for the purposes of the book.

The credit card bills are counted as negative savings. What this means, as paraphrased from the book, is that any money you are spending on your credit card, whether it be on a bill due this coming month, or a bill that is past-due, is taking away from your savings (and therefore your future). So in the scheme of things, credit card spending of any kind is taking away from building your savings. When I started this plan, I did things a little bit differently. I had credit card debt (because I was an irresponsible teenager), and therefore I didn't have any savings at this point. To save myself the trouble of having to calculate this complicated issue, I just maintained having "zero" savings for the purposes of the book, and later in the book it talks about taking the money you would have saved (going by 20%) and putting it toward paying off your credit card until it is paid off, and then put that 20% back into savings, and you're on the right foot again.

The book suggests that you do it in the opposite order. If I read correctly, I believe that it says to save so much money beforehand, $1000 I think, and then pay off your credit card debt, but I personally wouldn't be able to sleep at night if I knew that my credit card balance would grow that much considering late charges and interest accrual, etc. This system has worked for me and I'm in a much better place because of it.

I hope that you all have had success with the system and have worked out a plan that helps you to meet your financial goals If I can do anything to help, or if you have any suggestions for me, please let me know

[disneysteve]

Originally Posted by mariec99

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

Originally Posted by poundwise

I give this concept a great big shoulder shrug.

It reminds me of oversimplied fad diets.

We don't use this method, or any other method in particular. We currently save at least 25% of our gross income so I'm not at all concerned with how the other 75% gets spent, whether on wants or needs.

That said, for someone just starting out or someone who finds their finances really out of whack and trying to get a handle on things, I think a general guideline like this can be very helpful. You need to have some kind of rule of thumb to judge where you are and where you want to be. Just read through these forums and you'll hear people giving guidelines all the time - save 15% for retirement, mortgage payment no more than 28% of income, car payment no more than 10% of income, etc. For anyone looking for a starting point, I think this is a perfectly good one.

[snshijuptr]

Originally Posted by rarnold_416

I ratio is something to the effect of 60/24/16. Albeit it's not perfect, I'll soon have the rest of my debts paid off, and then things will work themselves out. I treat a few of the rules a little differently, for example, I have a cell phone, and that bill is roughly $90 a month. I take $50 from my needs, $20 from my wants, and that pays my cell phone bill. I justify doing it this way because it frees up a little bit of my needs money which lowers my need percentage, but it also draws a small amount from my wants, and this in turn motivates me to work towards lowering my overall spending, so that I can alter my numbers somewhat in the future, move my numbers closer to 50/30/20, and at some point in the near future, have more money to put in my pocket for my "wants" spending.

Well the first thing I would say is that you might be counting too many things as Needs. Do you Need a cell phone? No you don't. In my budget, needs are groceries, shelter, basic utilities (electricity, water), and necessities to work (gasoline, some school fees, internet if I paid for it). My Wants are everything else including entertainment, luxury utilities (cell phone, cable tv if I had it), and restaurants.

I will admit that I've never read the book, but separating a Want from a Need should not require a book, only common sense.

[isralexba]

These ratios are quite nice but unrealistic .... you would like to increase your income significantly or spend less in order to acheieve proper wealth well before the age of 85 ... i actually believe in investing in a wide spread of high yield bonds to ensure that the return will be appropriate and will compensate for inflation...