The Balanced Money Formula, also referred to as the 50-30-20 Balanced Money Formula, is a budgeting guideline proposed by Elizabeth Warren and Amelia Tyagi. It’s based on the ideas that work and no play creates a mindset of deprivation. It is thus ideal for those who love spending, plus helps them spend responsibly.
The idea here is to spend 50 percent of your net income on those absolute necessities like food, housing and transport. 30 percent should be directed towards your wants i.e. those things you purchase to make your life a little bit more comfortable. The remaining 20 percent is to be spent on savings or paying debt.
50% to be spent on absolute necessities:
- Rent/Mortgage
- Transport
- Groceries
- Utility bills
30% to be spent on your wants:
- Dinning out
- Pay TV
- Your phone expenses
- Vacations
- Accessories
- Movies
20% to be used in debt repayment and savings:
- Student loans
- Credit Card debt
- Emergency Funds
- HELB loan
- Retirement savings
The trick here is to keep your fixed expenses within 50 percent of your net income so that you can have enough cash to have fun with and to save.
If you love spending, then this is the budgeting system for you. The 30 percent allocated to wants is founded on the basis that living like a miser is a recipe for disaster. It recognizes the fact that most of us work hard so that we can have some fun with our money. Instead of working hard to pay bills, pay down debts and save for tomorrow, it gives you space to have fun as well.
To help you spend wisely on wants, it restricts your wants expenses to 30 percent of your net income. You’ll have to be very cautious on your wants expense so that you can stay within the 30 percent gap. Evidently, you won’t have it all so you’ll have to cut back on some of your wants. You can consider the following when selecting your wants:
- Why do you want it?
- How would life be different if you didn’t have it?
- What other things would change if I had it?
- Which things are truly important to you?
- Do your wants define your values
Would the Balanced Money Formula Work for you? Probably not.
With the current high cost of housing, high travelling expenses, and high utility bills would make it difficult to limit your need expenses to 50 percent of your network. Take for instance Antonio earns KES 30,000 as his net income, he will be forced to limit his entire needs expenses to KES 15,000 which would probably not be practical.
This budgeting formula is also no practical for those approaching there retirement age. As noted above, Antonio earns KES 30,000 as his net income, if he allocates 20 percent of this to his savings, it would mean he will be saving KES 600 every month. For someone approaching his retirement age and had no savings, allocating KES 600 per month on savings might not be enough to save up for retirement.
Allocating 30 percent of your net income on needs would mean you are spending more on today and saving less for tomorrow. Well, you will have an awesome youth, but a terrible retirement life, that’s if you won’t die young.
For those with a decent salary, the Balanced Money Formula is worth conmsidering, but for the local mwananchi (citizen) it might be difficult to implement. I’m pretty sure no one wants a failing budgeting system.