Who follows a strict budget allocation?

[buildmybudget]

A close friend of mine maintains there should be some kind of system based on age and income for budget allocation. For example, he is 29 and feels like he should be allocating a specific percentage of his income towards his mortgage, car payment, and savings and that this allocation should change by a certain amount over time as one gets older. Is this something people really need--a road map for what is "right" to spend throughout life?

What's really interesting is that my friend's comments are a direct reflection of receiving zero personal-budgeting education/training while growing up.

[snshijuptr]

I'm a fan of Suze Orman's 50/30/20 budget for Needs/Savings/Wants, though I think because my income is low because of age and grad school that its okay if it is really more like 55/30/15. I just would hate to see this justify over spending in a fellow young adult on uneeded luxuries (mine is mainly rent and gas...shame).

[dczech09]

I do not believe a "system" based on age and income would be helpful. The reason is because age and income generally do not have that strong of a correlation. For instance, at the age of 23 I am making 45,000 to 50,000 per year. However, I am willing to bet there are people in my age group that make more than me and there are people older who make less. What about the people out there who make obscene amounts of money each year?

A budget should be taylored to a persons indivdual finances and not based on some "system" that really does not catch all of the variables that need to be factored in. What about living situation, health, dependents, etc.? What if someone is "supposed" to spend no more than 25% on mortgage/rent but took on a larger payment due to not having any other debts?

With that said, I do believe that the older a person is, the more aggressively they should be saving for retirement. Its important to start saving early on (before age 25 in my opinion), but it should be a real priority upon reaching 40 or so. For people my age, quickly paying off debt is of higher importance than saving for retirement; they can save much more once debt free.

[jpg7n16]

I think systems like that are good as guidelines to see where your spending may be out of hand. But not necessarily to say, "well I'm only spending 15% on housing and I'm happy, but the system says 28%, so I'm gonna move up in home."

Much more useful as a red flag system.

Since I have no car payment, I'm well under on my transportation costs. Which is just fine - but if I was well over, that would be an issue.

[Eric80]

i dont have a percentage allocation but i calculate what money goes out and what is left i watch and closely and always leave a ssmall amount as back up money just in case.

[disneysteve]

I agree that age really isn't a factor. I also like the 50/30/20 plan but that doesn't come from Suze Orman. It comes from Elizabeth Warren.

[MonkeyMama]

No strict allocations, here.

Which way does he think it should change, with age?

To be fair, any "millionaire next door" type people I know have lowered their spending percentages with age (they save all/most their raises and pay off their debts. Thus, expenses lower while income increases). This is my overall plan, though I stay away from specific percentages and timelines, because every situation is so unique.

I couldn't help but wonder if this person thought they should spend more with age.

[jIM_Ohio]

A close friend of mine maintains there should be some kind of system based on age and income for budget allocation. For example, he is 29 and feels like he should be allocating a specific percentage of his income towards his mortgage, car payment, and savings and that this allocation should change by a certain amount over time as one gets older. Is this something people really need--a road map for what is "right" to spend throughout life?

What's really interesting is that my friend's comments are a direct reflection of receiving zero personal-budgeting education/training while growing up.

Save 20% of gross pay, regardless of income (and regardless of age).
As you near retirement start cutting expenses (pay off mortgage, paid for cars) so its probable that 30% of savings exists the year or two before retirement.

[am_vanquish]

The problem I see with this system (and several other "rule-of-thumb" systems) is that it can't account for past history. I have two 4-year olds in mind - first one start saving 6% into a 401(k) with a 100% company match at age 22, and the second didn't start saving for retirement until age 30 or 35. The allocation for retirement savings should be quite different for these two individuals.

Thomas Stanley uses a method in his "Millionaire Next Door" books that creates an expected level of net worth based on age and income. It isn't as specific as your suggestion for an allocation by category, but I think it would be a good starting point for how wide the spread should be between spending/saving at any given age. I don't have the formula off-hand, but I'll look it up later and post back.

This is rough & I'm coming up with it off the top of my head, but here's how I would expand on Stanley's method - maybe it's better to have allocations related to net worth & debt levels rather than by % of income.
Age 40:
Retirement Savings X * Annual Income, where X is somewhere in the neighborhood of 4=ish(?).
Home Equity Y% of home value, where Y is around 50% (?)
Student Loan Debt Z% of Original SL balance, where Z is 10%

Age 50:
Retirement Savings X * Annual Income, where X is somewhere in the neighborhood of 6-ish(?).
Home Equity Y% of home value, where Y is around 65 (?)
Student Loan Debt Z * Annual Income, where Z is zero

Obviously there should be more categories and the factors/percentages can change, but maybe that would provide a more objective benchmark. If you want to get really complicated, you can assign a weighting to each category also. Based on how far behind/head of each benchmark you are, your allocation will automatically adjust.

At least this way you're benchmarking against past performance in some way.

[jIM_Ohio]

The problem I see with this system (and several other "rule-of-thumb" systems) is that it can't account for past history. I have two 4-year olds in mind - first one start saving 6% into a 401(k) with a 100% company match at age 22, and the second didn't start saving for retirement until age 30 or 35. The allocation for retirement savings should be quite different for these two individuals.

At least this way you're benchmarking against past performance in some way.

Change a different variable (retirement age) and the two kids in your situation can both retire with same amount of money.

Change a different variable (savings rate) and they can retire at same time.

Change a different variable (retirement expenses) and they can retire at same time.

[bjl584]

My goal regardless of any other factors is to save a minimum of 20% toward retirement.

[maat55]

I follow DR's recommendation for allocations.

25% or less housing.
Own no more in autos,boats etc. total worth more than 50% of one years income(Pay cash).
Invest at least 15%