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Creating and sticking to a budget is hard. I get it! I agree! However, I do know that until I am able to naturally spend below my means without feeling like I’m depriving myself of something, I need to keep one or else risk a financial meltdown.
The process doesn’t have to be unbearable though.
My favorite budgeting framework is the Balanced Money Formula. The formula was created by Elizabeth Warren (yes, that Elizabeth Warren) and her daughter Amelia Warren Tyagi and is the basis for their book All Your Worth: The Ultimate Lifetime Money Plan. I highly recommend you pick up a copy as it’s an easy read packed with tons of valuable information.
- 5 Steps to Building a Basic Budget
- Zero-Based Budgeting
- Learning About Personal Finance: Books for Beginners
Elizabeth Warren’s Balanced Money Formula
Also known as the 50/30/20 budget, the balanced money formula is a budgeting framework that allocates a percentage of your total income towards 3 basic categories: essential expenses, non-essential expenses, and savings and debt repayment.
You may find that your expenses do not fall into this exact mix of percentages and that’s okay! Think of these percentages as more of a target that you should strive for.
As a note before we dive in, the examples given in each category is not an exhaustive list. If you have an expense not listed below, use your best judgment on which category would fit it best.
Essential Expenses- 50%
Essential expenses are your basic necessities for life. These are the things that are needed for you to function at the most basic level even if everything else had to be cut out.
- Mortgage/Rent payment
- Auto/Home Insurance
- Health Insurance (if not deducted pre-tax)
- Basic Groceries
- Minimum payments on credit cards and loans*
Minimum payments on credit cards and loans?
Living debt-free is the goal but that is a goal many of us are still working towards. To protect yourself from late fees and the rate jumps that accompany them, the minimum payments for your debts should be included in your essential category.
Reducing the Essentials
If your essential expenses are more than 50% brainstorm ways of lowering them such as being energy conscious to lower your electric bill, work out a deal with other parents for a rotation of child watching, lower your “basic groceries” by participating in Meatless Mondays, or shop around for better deals on auto and home insurance.
Non-Essential Expenses- 30%
These are your wants, the nice to haves, and little extras. Basically, if you could live without it without much struggle, it should go in this category.
- Dining out/ Luxury food
- Shopping trips
Trimming the Non-Essentials
To lower your non-essential expenses consider cooking and eating at home more often, cut the cord on cable and switch to a streaming service like Netflix or Hulu, donate your time instead of your money to charities (they often value your time more anyway), or explore your own city and surrounding areas for fun things to do instead of traveling great distances.
Savings and Debt Repayment- 20%
This is the category that is missing from many budgets but is incredibly important for ensuring that you have a stable footing in the future. Savings and debt repayment, as it’s title suggests, is the category for your savings goals and debt repayments over the minimum. It’s also the category for any investing that you may do.
- Payments over the minimum on credit cards and loans
- Roth IRA
- Emergency Fund
- College Savings
- Other Investments
Are you above 20%?
If your savings and debt repayment is over 20%, that’s excellent! That’s how you want it to be, obviously. Continue with this until your debts are all paid off and that 20%+ is going into sweet, sweet, savings and investments.
This budget helps with 2 things. One, if any hardship strikes, you can be confident in your ability to live on just half of your current income for however long the hardship persists. Two, you have a set amount you are targeting to save each month, allowing you to get ahead.
If you’d like to learn more about the balanced money formula and the theory behind it as well as some amazing tips from the authors I highly recommend you pick up their book All Your Worth: The Ultimate Lifetime Money Plan.
If you have a tip or trick for lowering your expenses or experience with the balanced money formula, tell us about it in the comments!