2710: The Balanced Money Formula by JD Roth of Get Rich Slowly on Personal Finance Habits

[00:00:00] This is Optimal Finance Daily, Episode 2710, The Balanced Money Formula by JD Roth of GetRichSlowly.org

[00:00:09] and I'm your host and personal finance enthusiast, Diania Merriam.

[00:00:13] Now let's get right to it and continue optimizing your life.

[00:00:17] The Balanced Money Formula by JD Roth of GetRichSlowly.org

[00:00:26] Building a budget is one of the basic tasks of personal finance, but not everyone can keep a budget.

[00:00:32] As much as I'd like to, I don't feel comfortable with detailed planning.

[00:00:36] I continue to use a spending plan as a rough guide to my future, but a traditional budget just doesn't work for me.

[00:00:43] Last night, I stumbled across the Balanced Money Formula proposed by Elizabeth Warren and Amelia Taiage

[00:00:50] in their excellent book, All Your Worth, The Ultimate Lifetime Money Plan.

[00:00:55] Like my spending plan, the Balanced Money Formula is an alternative to traditional budgets.

[00:01:01] Though I considered this concept a little light in the past, it really hit home yesterday.

[00:01:07] It helped me to realize that my own spending has become unbalanced.

[00:01:12] The Balanced Money Formula

[00:01:15] The Balanced Money Formula is based on your net income, your income after taxes.

[00:01:20] The authors say that ideally no more than 50% of your paycheck should be spent on needs

[00:01:26] and keeping them below 35% is best.

[00:01:29] Of the remaining amount, at least 20% should be devoted to saving while up to 30% can be spent on wants.

[00:01:36] That's it. Simple. Three categories. No detail.

[00:01:41] This is the sort of big-picture budget that I find useful.

[00:01:44] And in this case, I could see that there was something wrong with my wants.

[00:01:48] Here's how the authors define these terms.

[00:01:51] Needs are things you pay no matter what.

[00:01:54] Housing, food, utilities, transportation costs and insurance.

[00:01:58] Wants are everything else. Cables, television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.

[00:02:08] And saving comes last in this plan.

[00:02:11] Everything left after you take care of wants and needs is set aside for the future.

[00:02:15] If you want to get out of debt, that's also tackled here.

[00:02:19] The authors write, quote,

[00:02:22] When your money is in balance, you always have enough to pay your bills, have some fun and save for your dreams.

[00:02:28] And here's the best part of all.

[00:02:30] Once your money is in balance, you can stop worrying about it.

[00:02:33] Managing your money becomes automatic.

[00:02:36] End quote.

[00:02:37] This balanced money formula is a goal. It's an ideal.

[00:02:41] If you're just beginning to manage your money, your financial life will probably be distinctly unbalanced.

[00:02:47] For example, if your income is small or your mortgage is large, you might be spending 80% or more on needs.

[00:02:55] If you're a compulsive spender, if you like to dine and find restaurants and to collect humble figurines,

[00:03:01] you might be spending 45% of your income on wants.

[00:03:05] And of course, few people starting out can afford to set aside 20% of their income for savings.

[00:03:11] The authors say that your goal should be to move from your current state to something more balanced.

[00:03:17] For some, that's as simple as reprioritizing expenses.

[00:03:21] For most, it's not that simple.

[00:03:23] When your needs are too high, for example, you severely cramp both wants and savings.

[00:03:29] Because most of your income goes to necessities, you don't have enough for fun or for the future.

[00:03:35] To remedy this, you might need to take drastic action.

[00:03:39] You might need to move into someplace more affordable, perhaps even to a different city.

[00:03:44] You might need to find a better-paying job. These are not easy steps.

[00:03:49] Life out of balance.

[00:03:51] In many ways, the balanced money formula is brilliant.

[00:03:55] I agree wholeheartedly that needs should be kept under 50% of net income.

[00:04:00] That's a good idea to split needs, about 25% for housing and about 25% for all other needs.

[00:04:07] I also agree that saving at least 20% of your income or using that money to repay debt

[00:04:13] is an excellent way to find the path to wealth.

[00:04:16] But what about that 30% for wants?

[00:04:19] The authors write, quote,

[00:04:22] you can spend your wants money on anything that strikes your fancy

[00:04:26] What does you stay within 30% of your income?

[00:04:29] End quote.

[00:04:31] In fact, they warn against spending too little on wants

[00:04:35] suggesting that those who spend less than 20% of their income on the things they enjoy

[00:04:40] might be missing the point of money.

[00:04:43] They say, quote,

[00:04:45] you certainly won't get into trouble spending like this on wants.

[00:04:49] Even so, you should ask yourself, are you making enough room for fun?

[00:04:53] End quote.

[00:04:55] That's a good question.

[00:04:56] And here's the truth.

[00:04:57] I'm spending less than 10% of my income on fun and I can tell I'm growing a little cantankerous in my old age.

[00:05:05] I'm letting things like a trip to the movies raise my blood pressure when I should just be enjoying life.

[00:05:10] I've paid off my debt.

[00:05:12] I'm not spending foolishly.

[00:05:14] I can afford to go to a movie even if it's expensive.

[00:05:17] I can afford to spend the extra 29 cents to have a great mug of cocoa.

[00:05:22] All work and no play.

[00:05:24] I've written a lot lately about frugality and I'm not about to give up my frugal ways.

[00:05:29] Thrift has been successful for me, has helped me to build wealth.

[00:05:33] But as some readers have noted, one reason to save money is to enjoy it.

[00:05:38] It's not just for the future but for today.

[00:05:41] Revisiting the balanced money formula last night brought this point home to me.

[00:05:46] I've allowed my own money equation to become unbalanced again.

[00:05:50] Over the past few years, I've become a super saver.

[00:05:54] Initially, this money went to debt reduction.

[00:05:57] Now it goes to saving and investing.

[00:05:59] I'm proud of paying off my past and providing for my future

[00:06:03] but maybe it's time to spend a little money on today.

[00:06:06] Maybe it's time to indulge myself.

[00:06:08] Maybe it's time to give myself a budget for fun.

[00:06:12] The balanced money formula puts a lot of minds at ease.

[00:06:15] It can definitely help you put your finances in automatic mode

[00:06:19] but its simplicity also lends itself to being applicable to other life circumstances.

[00:06:25] If you're reaching for a goal, letting yourself get out of balance with the formula is what naturally happens.

[00:06:31] I also think being out of balance is something that should last only for a certain period of time.

[00:06:37] But what do you think?

[00:06:38] You just listened to the post titled The Balanced Money Formula by JD Roth of Get Rich Slowly.org

[00:06:49] and I'll be right back with my commentary.

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[00:08:41] I've found that optimizing on the bigger areas of my budget, namely housing, transportation and food,

[00:08:47] allows me to not worry much about splurging in other areas.

[00:08:51] It's nice to know that money is there in situations when you would really just appreciate the convenience of a cab ride for example.

[00:08:59] Or you have to because there's no other options.

[00:09:02] And you know that it's not going to break the bank.

[00:09:05] I think the key is to not be gluttonous when it comes to paying for convenience.

[00:09:10] Many of us would always take the cab and never even consider public transportation.

[00:09:15] The thing that matters so much more than an expensive cab ride once in a blue moon

[00:09:20] is the things you spend money on regularly, especially your fixed costs.

[00:09:25] If your fixed costs like your rent or mortgage, car payment, insurance, etc. are high

[00:09:30] and you're basically living paycheck to paycheck, then all of your spending on everything else becomes a much bigger deal.

[00:09:37] And it's probably good for all of us to have a season of life where we grapple with this stuff.

[00:09:42] It can help us fine tune what we feel is worth spending money on and what isn't.

[00:09:47] That season for me was when I was getting out of debt.

[00:09:50] I was super aggressive and I would walk an hour to get somewhere before I would pay for a cab.

[00:09:55] While that attitude led me to get out of 30 grand of debt in 11 months,

[00:09:59] I don't think that level of frugality is sustainable for my whole life.

[00:10:04] There comes a point where you can relax a little bit and not fret about taking the death of cab.

[00:10:10] For me it was when I reached debt freedom, had a solid emergency fund and was fully funding my retirement vehicles.

[00:10:18] And that should do it for today. Have a happy rest of your day

[00:10:21] and I'll see you on the Thursday show tomorrow where Optimal Life awaits.