Money Commandment #1

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists money commandment #1 as follows:

• The old-school rules: Live within your means.
• The bubble economy rules: Live to the max, with easy low payments.
• The new rules: Use the 50/30/20 budget to know what you can really afford and what you can't.

To explain the last section the 50/30/20 budget takes after-tax income and divides it as follows:

• 50% goes to "must-have" expenses like food, housing, utilities, etc.
• 30% goes to "wants" like vacations, gifts, entertainment, etc.
• 20% goes to savings and debt repayment.

Now, here are my thoughts on all of this:

• I guess I'm old-school a bit because I still like to have "spend less than you earn" as the foundation for my personal finance advice.
• Next, I'd recommend anyone considering adopting a new budget to start with the 10-10-80 budget. It's simpler than the one above IMO.
• That said, the 50/30/20 budget does give more detail as well as encourages people to save more -- two things I like about it. So I'd say after a year or two on the 10-10-80 budget, a person could advance to 50/30/20.
• It all comes out of the same pot, so if you want to spend more in one area, you need to spend less in another. I just wouldn't mess with the last 20%. So, for instance, the 50/30/20 budget my morph into the 60/20/20 budget or the 40/40/20 budget based on your personal situation, but it shouldn't get to something like the 60/40/0 budget or 50/40/10 budget. The last 20% needs to remain firm -- especially for those who have had budgets for several years (and should now be out of debt.)
• And yes, you need to work giving into the first 80% of the 50/30/20 budget -- don't take it out of the last 20%. You'll need to work up to this over time (that's why I suggest starting with the 10-10-80 budget), but it can be done.

There's a lot of worthwhile stuff in this book and I'll be sharing much of it over the next couple of weeks. Stay tuned.

Comments

[Dr Dean]

I think having a basic plan or outline for spending is the important first step.

Making the choice to code a bill a "need" or "want" helps to clarify your spending choices. (as long as you are at least somewhat honest with yourself)

[Everyday Tips]

I think these rules should vary based on your financial situation. If you have credit card debt, spending 30 percent on 'wants' is financially irresponsible in my opinion. If you are independently wealthy, then feel free.

My, I just try to live below my means and save ahead for any wants after everything else is taken care of.

[Money Reasons]

Other an one time shot deals (like buying a new or used car), such percentages would be hard to derive for the average consumer that doesn't use a budget. So using that as my basis, I would stick to the "live below your means" too.

Hmm, I wonder how many people actually use a budget? It would be interesting to know the percentage of the population that use such a tracking mechanism...

[Scott Messner]

I guess I'm also old school. Like Everyday Tips stated, it depends if you have debt. Spending 30% of your income on wants while swimming in debt is not a good idea.

[Venkat]

FMF-- Did you or your wife, was there anytime till now, that you or your wife wanted/contemplated to be stay-at-home Parent?

[MC]

Living within your means is "old school"? Bizarre!

[Matt]

20% goes to savings and debt repayment? 30% to wants? I think this needs better clarifiaction in that 20% to savings and debt repayment usually means 20% credit card debt payment for people.

30% for wants is also vague.I need a car but I really want a BMW? Too easy to manipulate depending on the persons thinking.

[FMF]

Venkat --

My wife has been at home for the past 12 years or so...

[LotharBot]

If I were to recommend a budget in this style, I would classify "debt repayment" as taking away from wants rather than savings. Using their numbers: 50% to needs, 20% to savings, and 30% to debt first and wants second.

I'd also recommend using that as a starting point, and then increasing savings over time, while keeping spending constant or even reducing it. If you can get to 35% needs, 15% wants, 50% savings, you buy yourself an amazing amount of flexibility.

[Lucas]

To be fair the first place that I heard of the 50/30/20 budget was in the book "All Your Worth: The Ultimate Lifetime Money Plan" which predates the above book and goes into great detail about what is to be classified as need/want/savings-debt repayment. It is my favorite personal finance book of all time and is a must read.

I have only been using this for a couple of years, but I just checked and my wife and I are currently at 30/20/50 all-time (I include extra principal debt repayment in the savings category as the book instructs you to). The only debt we carry is our mortgage. The one caveat that we found was that getting the want percentage above 25% was just turning into materialistic purchases (aka wasting money on stupid things) so that is why we have backed off on wants so much.

[Georgia]

I am retired and doing okay. I go 60-20-20 = living expenses and wants - giving - savings. I have no debt. I use 2 cc's each month and pay them off each month.

My 503b is low to what most people say we need (less than $100k), but I do not need it to live on.I use the 503b to do stuff around my home if it is needed and then the rest of my minimum withdrawal goes into savings.

I have enough in savings to buy a halfway decent used car if I need another one. As of last month, with all but one repair included, my monthly average for repairs and maintenance is around $103. If it goes over $120-125 for 2-3 months, I will be looking for another car. Even at the higher amount, it would be difficult to buy another car for that amount of payment.

I did not work my finances well most of my life, but in retirement I am doing very well, with my SS and 2 small retirements (mine and my husband's.)