How much should you spend on . . .

[Midpack]

Not new so many here have probably seen it, but I thought this was a good broad framework for budgeting expenses. When I've been asked by younger folks about budgeting for short and long term, I've typically provided too much detail, this might have been better. FWIW...might be useful with kids, friends, etc. who ask.

And secondarily, while 50/30/20 (detail below) is intended for those working toward FI, it might apply to FIRE's too. Instead of 20% toward saving and debt repayment, for a FIRE individual the 20% would be for large or unexpected expenses (car replacement, major home maintenance, etc.). I guess I say this because our annual budget comes very close to 50% essentials, 30% "wants" and 20% set aside for car replacement, major home maintenance, etc.

It's simple, if not easy. It's designed to work for any income. Its purpose is to help you live your life while building financial security and minimizing the chances a setback will send you over the edge. It's the 50/30/20 budget. Here's how it works:

You start with your after-tax income. That's your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes, and disability taxes. If your employer deducts other expenses from your paycheck, such as 401k contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income.

You aim to limit your "must-have" expenses to 50% of that after-tax figure. "Must-haves" include all the basic expenditures you really need to make each month: outlays for housing, utilities, transportation, food, insurance, child care, tuition and minimum loan payments. If you can delay a purchase for a few months with no serious consequences -- for example, clothing or dining out -- it's not a must-have. If you're contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), it's a must-have, at least for now.

Your "wants" can consume 30% of your after-tax pay. Vacations, gifts, entertainment, clothes, eating out and other expenses are all "wants." Some bills you pay might overlap the two categories. For example, basic phone service is a must-have. But features such as call waiting or unlimited long distance are wants. Internet access and pay television are two other expenditures that can feel like must-haves but usually are wants, unless you're on some kind of long-term contract.

Savings and debt repayment make up the final 20% of your budget. Warren's a bankruptcy expert, remember, and she knows the devastation that results from too much debt and too little savings. To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund. Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds.

The 50/30/20 budget fix - 1 - budgets & spending - MSN Money

 

[Mulligan]

Ive never understood how most of my friends have no idea about budgeting or even where their money goes. It really isnt rocket science. In my opinion, they are too bored with the follow through, than lack of intelligence to do it. I personally like knowing where my money goes and tracking it, but not to the last dollar spent though. If I met my monthly savings goal, I am fine. If I dont, I track down and analyze why. Since I am retired and dont have to save for retirement, I allow a little wiggle room if I go over for one time expenditures.

 

[pb4uski]

Wouldn't our society be a lot better if everyone adhered to these LWYM guidelines? Seems quite sensible to me. Limiting "must-haves" to 50% may not be achievable for those on the very bottom rung of the ladder (for example someone living alone and making minimum wage).

 

[MBAustin]

Thanks for sharing. I hadn't seen this before and it really makes sense as a simple framework to work from. Already sent it to DD (who has fortunately now joined the ranks of EMPLOYED 2011 liberal arts graduates!).

 

[skyvue]

Looks very close to what Gail teaches couple on "Till Debt Do Us Part". I would say this is a good plan for most people but not agressive enough on the savings side for those of us who want to retire early due to not liking their work.

 

[Chuckanut]

Avoiding excess debt is one way to help guarantee one's freedom. It is sad to see people who would like to retire, take another less troublesome position, spend more time with the family, but can't because they dare not give up one dollar of earnings.

 

[Walt34]

Ive never understood how most of my friends have no idea about budgeting or even where their money goes. It really isnt rocket science.

I see this a lot too with some (not all) relatives. One SIL talks about her retirement, wants to move to Sarasota, FL, go to restaurants, time at the beach, have a convertible car, etc.

This is the one whose "emergency fund" is $500 cash in a drawer, who is now looking at refinancing the house to pay for a new roof, and who has purchased four new cars in the last eight years. "Well, the payment was only $15 more a month."

Unless they win the lottery the view from here is that she's in for a very rude awakening. She'll be on Dave Ramsey's "rice & beans" diet with the occasional treat of some Alpo.

 

[rescueme]

Wouldn't our society be a lot better if everyone adhered to these LWYM guidelines?

But, but, I deserve more ...

 

[Closet_Gamer]

Wouldn't our society be a lot better if everyone adhered to these LWYM guidelines? Seems quite sensible to me. Limiting "must-haves" to 50% may not be achievable for those on the very bottom rung of the ladder (for example someone living alone and making minimum wage).

I actually think some legislation is in order this regard.

It's twisted that in order to put $500k into a private equity fund you must, by law, demonstrate that you have sufficient means (I believe $1M net worth). But if you want to borrow $500k for a house all you have to do is lever that baby up...and then lever it some more to get that new car. Another $40k in unsecured credit card debt? Go for it! Still paying the college loans... No worries, we'll re-amortize them for you.

We have laws limiting the risks ordinary people can take with assets they have on their balance sheet, but we have essentially no constraints on the debt people can pull onto their balance sheets. Risking assets can, at worst, take your net worth to zero. Debt can take you negative...as lots of people are living thru right now. And we've all learned that due to our convoluted banking structure, we collectively wind up on the hook.

I don't want the govt micro-managing folks finances but if we're all on the hook, some debt guard rails might be in order. Something broad like:

1) debt payments::income -- cannot exceed 35% (all sources of debt)
2) debt principle::annual income -- cannot exceed 300%
3) debt::assets -- cannot exceed 125%

The last is clearly the best but marking assets to market is so opinion driven as to be unworkable at scale. Everyone would buy an antique clock and claim it was worth $1m. The first two at least adhere to the rule that "cash is a cold hard fact."

If everyone adhered to even these liberal guidelines (or something like them) we'd be in better shape.

Toss in a brazil style social security where 10% of income comes off the top into a private retirement account and you'd really have a viable structure.

 

[panacea]

In my experience, most people either don't understand the concept of budgeting or just don't care. Pretty wierd. But it seems to me that actual "budgeting" isn't necessary if a few basic guidelines are followed:
1) Determine your fixed expenses, including income taxes.
2) Don't over-spend on big ticket items
No more than 25% of gross income for housing, including mortgage, taxes, maintenance and utilities.
No more than 25-30% of gross income for vehicles and drive them forever.
No more than 4% of gross income for vacations.
3) Save 15% for retirement (more if you want to retire early).
4) Set aside enough money every month to prepare for large non-recurring expenses. For example, $150 per month to pay cash for your next car in 12 years and $200 per month for home maintenance and repairs.
5) Spend whatever's left on anything you want.

I might be oversimplifying a bit, but I think it works.