I bet a lot of people have a similar experience when they realize they have a problem with their finances. They create a budget â€“ or they try to anyway â€“ and, somewhere down the road, they get frustrated with the amount of effort required to keep it up. Ultimately, a lot of them give up budgeting altogether.
That was J.D. Roth’s experience. Mine too. As J.D.’s journey unfolded, he became frustrated with the traditional budget, calling it â€œtoo fussyâ€; but he didn’t give up. Instead, he created a spending plan and used it for years. He’d come across the Balanced Money Formula before, but thought the concept was â€œlight.â€
The Balanced Money Formula
Here’s how he described the concept in 2009:
â€œThe Balanced Money Formula is based on your net income (your income after taxes). Warren and Tyagi say that, ideally, no more than 50% of your paycheck should be spent on Needs (and keeping them below 35% is best). Of the remaining amount, at least 20% should be devoted to Saving, while up to 30% can be spent on Wants.
â€œHere’s what it looks like:â€
Should you let the formula get out of balance?
But in 2009, when he gave the formula a second look, it was as if the lights came on. He recognized not only the simplicity of the model, but also that his financial picture was out of balance. Interesting.
The authors say, â€œOnce your money is in balance, you can stop worrying about it. Managing your money becomes automatic.â€
But even though the authors encourage people to move toward balance, I think there are times you might want to let your budget get out of balance â€“ for a purpose.
J.D. offered a few insights:
â€œThis Balanced Money Formula is a goal. It’s an ideal. If you’re just beginning to manage your money, your financial life will probably be distinctly unbalanced.
â€œFor example, if your income’s small (or your mortgage is large), you might be spending 80% (or more) on Needs. If you are a compulsive spender, if you like to dine in fine restaurants or to collect Hummel figurines, you might be spending 45% of your income on Wants. And, of course, few people starting out can afford to set aside 20% of their income for Savings.â€
Here’s what that might look like:
Small income/Large mortgage
Here’s how your budget might be out of balance if you’re trying to reach a goal:
Someone trying to build their emergency fund
Someone who is financially independent
The Balanced Money Formula puts a lot of minds at ease. It can definitely help you put your finances in automatic mode. But its simplicity also lends itself to being applicable to other life circumstances. If you’re reaching for a goal, letting yourself get out of balance with the formula is what naturally happens. I also think being out of balance is something that should last only for a certain period of time, but what do you think?
If you use the Balanced Money Formula, do you ever purposefully get out of balance? How long do you stay out of balance?