The Balanced Money Formula: Why it wouldn’t work for me

The Balanced Money Formula suggests that you spend 50% of your net income on needs, 30% on wants, and 20% on savings.

If I followed that, I would split my net income up like this:

  • $3,500 on needs
  • $2,100 on wants
  • $1,400 on savings

To me, that is a really low amount to savings – I normally save somewhere around $3,000 – $4,000 per month. My net income is actually budgeted to be split up something like this:

  • $2,200 on needs (31%)
  • $1,500 on wants (21%)
  • $3,300 on savings (47%)

So I have basically swapped savings for needs at the 50% marker, wants for savings at the 20% marker, and needs for wants at the 30% marker.

I think that at a net income of $7,000 or so per month (checking account direct deposit with 401(k) contributions added back), spending 50% on needs is a bit excessive and I would argue that at my income, 30% on needs 20% on wants, and 50% on savings is a much more balanced formula.

My needs and wants have definitely been going up continually, but I think I’ve found a pretty good balance of what I want to spend money on and spending money on what is important to me.

How did I split these groups up:

  1. Savings: my 401(k) contributions, cash and taxable investment contributions
  2. Needs: Rent, renter’s insurance, water, sewer, gas, trash, parking in my apartment building, car insurance, electricity, keeping my driver’s license and passport up-to-date, renewing the tabs on my car, maintaining my car, putting a tank of fuel in my car each month, internet at home, groceries.
  3. Wants: smartphone, sports, Pandora, Remember the Milk, and Dropbox subscriptions, income tax preparation (I could do it myself), personal domain registration and hosting, TiVo, clothes, social, dinners and lunches out, getting my eyebrows waxed, hair cuts, make-up, occasional trips to the spa (once or twice a year), a new cell phone and computer every few years, parking meters (I don’t have to drive where there are parking meters – I can bus or walk, mostly), parking at work if my employer doesn’t pay for it, travel, donations, and presents.

Readers, have you ever tried the balanced money formula? Why did it or did it not work for you?

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26 thoughts on “The Balanced Money Formula: Why it wouldn’t work for me

  1. We’re at about the balanced money formula on one salary, but lots more savings if you include both incomes. And I’m fine with that. I prefer the idea of “enough” and not feeling like you have to spend more than “enough.” Though our “enough” does require quite a hefty income…

    • I don’t like the idea of having to spend more than “enough” either. As you’ve said before, you find things to spend money on quite easily without planning to. At least you have pretty good job security to know that your “enough” can be fulfilled :)

      • Well… once DH loses his job we need to come up with about 20K more in income/year to not have to make cuts… which will probably partly come out of retirement saving (something we’re possibly over-doing right now). Stupid lack of cost of living increases.

        • What does “over-doing” really mean? We are now at a point where we’ve made up for all the years we were in graduate school making diddly-squat. We’re on track if our income is assumed to be our current joint income. We’ve “over-saved” if our income is assumed to be just my income. We don’t have enough to retire yet or to stop contributions completely. (And it’s hard to say no to tax-advantaged savings vehicles.) We talk about these issues sometimes in our mortgage update posts on the first of the month.

  2. I’ve tried it and it really doesn’t work for me. I’ve been able to cut my needs to the bare bones by having roommates, etc, so that I have more money left over for savings and wants. I don’t think I’ve ever calculate how much I spend in each catagory percentage-wise.

    • I hadn’t either until I did this exercise! It was kind of interesting since I’d never thought about the difference between needs and wants before.

  3. To be fair, (IIRC) I think they say 50% or LESS on needs, and by needs they really mean “fixed expenses” — contracts you couldn’t get out of right away if you had a sudden job-loss that took half your income (and also things like the amount of food that you need to live).

    • If that’s the case, then my cell phone goes in needs too because I’m under contract. My groceries bill would probably also go up (and the various eating out categories to zero) if I lost my job and had to prepare all of my meals myself.

  4. I found a way of listening to the music I like through having a youtube account which I then play my favorites on my smartphone. No need to download music and they can be sorted into playlists or just shuffle your favorites. Yes, the video mode draws larger data downloads but luckily I signed up back when contracts offered true unlimited data plans (T-Mobile).

    I justify my smartphone ‘wants’ by using the phone to finding many ways of saving money. It has truly been an investment!

    • I could honestly count my cell phone as a need as well since I expense part of the data plan, which cuts the real cost to me down to closer to $60/month including taxes, which is pretty close to what I was paying with my previous system of prepaid cell + Vonage at home for longer calls.

      Paying for Pandora pretty much eliminates me buying any music too (not that I would really do that all that much anyway).

  5. I love the balanced money formula for a couple of reasons. 1) the big picture approach- I am not an itemized budget type of person 2) the idea that you should always make room for wants. When I first found this formula I felt like I had no disposable income. After using this formula I was saving ‘too much’. As a frugal minded

    • Oops. As a frugal minded formula I used to feel guilty about spending money on things that were not a need. As our incomes have grown we also now save more than 20% of our income.

      Now I use it similarly to n&m and try to keep our needs (not including child care which is a huge part of our budget) at less than 50% of one of our incomes.

  6. I’ve been using the BMF since 2005. When I first started using it, I was severely out of balance. I think I was around 60% for needs. Using the BMF as a guideline, I’m much more in balance now. Like NoTrustFund, one of the things I really like about it is the big picture approach. I still track my spending, but as long as I’m within the % targets, it lets me avoid getting into the weeds too much.

    And I save as much as I want. There’s nothing in the book that stops you from doing that if you want to. In fact, if you want to save more than 20%, that makes you a Super Big Saves, as the book calls it.

    I also consider certain things a need that the authors probably would not. For example, I think that in 2012, internet at home is a need, like you have, and not a want. The authors, at least at the time the book was written, would likely disagree with this.

    • I think that that sounds like a good case where the BMF could/would help. I would equate internet now to having a home phone in the sense that it is a need for communication.

  7. Well, the thing is, you really only NEED a certain amount to live on. So the higher your income, the easier it is to save all the extra beyond that monthly nut.

    It’s been a while since I calculated our percentages, but we’re a bit higher on saving and a bit lower on needs.

    Like someone else said, I’m pretty sure that 50% needs is a MAXIMUM (kind of like all those percentage rules about rent as a proportion of your income, etc).

    I can definitely understand how someone would spend 50 percent on needs especially when they’re starting out – again, it’s that base of living costs. My partner does not make enough to save anywhere near 50 percent of his income. Rent plus food plus utilities is pretty much half, without accounting for transport, clothing, etc.

    • Totally agreed on the needing a certain amount to live on. If you look at most of the needs, I can’t really control most of those costs.

      My rent and housing costs? I could change by moving, but I would either need to get a roommate or move further away from work to reduce the cost. Car insurance? You can shop around, but I’ve done that and my current total insurance cost is cheaper by at least $200 per year than any other insurance company.

  8. I have used the formula to make sure I am within the range, but I definitely target savings being higher than the 20% target. I have used the formula with clients who are having issues with high levels of consumer debt, so I use it as a guideline to help put their priorities into perspective. Great post!

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