Taking Issue With The Balanced Money Formula

balance scale

If you’ve read the book, “All Your Worth” by Elizabeth Warren, you’ve probably seen her “Balanced Money Formula.” You may have seen it even if you haven’t read the book because it has become the budget of choice for many media pundits and writers. For reference, the formula is as follows:

Needs = 50% of your income
Wants = 30% of your income
Savings = 20% of your income

The formula is designed to be a simple budgeting tool for those who don’t want to take the time to figure out individual budget categories, or who lack a sophisticated understanding of money and budgeting. All you have to do is keep three categories in mind and adhere to those

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8 Responses to Taking Issue With The Balanced Money Formula

  1. I agree completely with this article. People should be able to have some fun now, but not at the expense of basic living later. Additionally, kids need to understand that finance is, like it or not, complex. An in-depth look at money can mean having more to spend. Parents thus can do their kids a favor by not oversimplifying. For a basic start, though, tools such as bankaroo are terrific.

  2. Chris Smith says:

    Jennifer, terrific article. 20% might be a good number if you are just graduating from college, AND have relatively low student debt to pay off, but even then you’re cutting it close. On top of that, the formula makes it sound like “needs vs. wants” is a nice clean distinction, but in real life most big expenses are a mix of the two. I think this makes most people using the “formula” classify a lot of wants as needs, then feel squeezed – and take the difference out an an already-too-low savings %.

  3. MoneyWYN says:

    Guess I’m in the minority here, but I’ve found the formula very helpful over the years. I’ve used it as a guide that I have adjusted to fit me, and not as something that is set in stone.

    The book doesn’t say you must have only 20% savings or 50% needs. You can save over 20% if you want. You’ll just be classified as a “super big saver”, as stated by the authors. And if your needs are less than 35%, you’re in the “safety zone”. No one says you have to be exactly at 50, 20 or 30.

    I think most people should use the formula as a measuring stick to give you a sense of at least where you should be, if you’re not there, but not where you need to stay.

  4. Aleta says:

    I agree with this article. I read her book years back and found it to be a good guide. My needs category ran higher because I live in a state with expensive homeowners insurance, car insurance, and house taxes. That plan was workable when the book was written but that was before the financial chaos we’ve all gone through.

    One thought that she tried to convey in the book that people put fun on the back burner. Everyone needs a balance.

    This book was helpful until the latest financial collapses we have upon us.

    Even though we saved money I didn’t expect my husband to have a heart attack. We also live in a area that has some of the most expensive healthcare in the U.S. After the insurance has paid, we still owe over $20,000+ out of pocket not to mention the $350. meds a month. Our health care premium is $2.255. a month. because we are older.

    Our children poked fun at us for saving. If we hadn’t we could not have survived along with his work in the construction industry that suffered as well and he took a $12. hourly drop in his salary. Her book proved true for us.

    She is also talking about post tax not pretax. Know your expenses in your community and just keep saving. Do not throw out a number out there like 12 mos salary saved. Yours may be more if you’re self-employed, with no matches for your IRA’s, vacation pay, sick pay, holiday pay, or vacation pay. You have to look at each couples financially situation accordingly.

  5. Gail says:

    I wish our income was such that we could live on 50% of it! My hubby was sick with a cardiac problem a couple of weeks ago. Two days in the hospital = $18,000 plus $1000 for doctors that we have gotten so far! Due to our health problems, instead of saving we keep funneling just about everything into health care like it or not. the more sick you are, the less you have the ability to make as well. Or biggest goal is to not fret about the bills and trust that God will somehow supply our needs. It isn’t like we have been lazy and never worked. I’ve been supporting myself since I was 17.

  6. Aleta says:

    Do not think that everyone is covered under the new healthcare system. I checked with our insurance carrier because of an article that I read. I found out that the ins. co grandfathered in our ins and that we do have a limit to what they can pay and everything remains the same with us. We also don’t get the free mammograms or tests that they said were offered. Make sure that you check with your insurance company. The new insurance is more for those whose companies update their policies, not for those of us who have private health insurance.

  7. Nika says:

    1. Still, if everybody managed to save 20% of their income, they would be much better off than they are now, with many not saving anything.

    2. There is a balance to “now vs later” and regrets. One needs to think long term, but also, life is to be lived at every stage and opportunities don’t linger forever. And, you can’t travel in the same way in your 70s as you can in your 20′s or 30′s, before you have a baby and after… something to think about. For example I’m glad we backpacked with no plan through Asia and South America before we had a baby (I would not hitchhike though China with a toddler)

    3. What is needs and what is wants is a bit of a personal call. Sure, some things are clearly a want — like HBO or a ski trip. But others, like organic milk and wild fish for your child is harder to define. So how much of a $900 monthly grocery budget is a want and how much a need? Is there a value to a potential health benefit and thus lower medical expences in the future?

  8. Gunnar Tveiten says:

    An emergency-fund isn’t saving: it should sit statically at a suitable amount, say 2 months pay. Whenever you need to dip into it, you should thereafter refill it, but that’s -also- not saving, because it’s just compensating for the dipping. (If you withdraw $5K from emergency in february, then save and put those money back in in the following 5 months, your overall savings are null, it balances out.)

    20% of savings is *plenty* if you’re young. A couple with modest income of $60K/year would be saving $1000 a month. If you do that starting when you’re 30 – you’ll have aproximately a million dollars saved up by the time you’re 60. That’s enough to cover retirement and then some.

    But if you start at 50, the numbers look very different.

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