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Life_is_Simple
4-29-12, 1:16pm
I'm reading the book "All Your Worth" by Elizabeth Warren and Amelia Warren Tyagi. They advocate putting 50% of your after-tax income toward needs, 30% toward wants, and 20% toward savings.

It's interesting to do the calculations, and I hope some others on here will check their spending to compare with me and discuss. Interesting, and maybe a bit disturbing depending on how one's calculations go :laff:

I looked back at the last 6 years. It took me a LONG time to determine what are wants vs needs. In the end, my spending turns out to be 51% needs, 31% wants, and 18% savings. So not that far off.

Needs are supposed to be:

housing: mortgage/rent, utilities, basic phone (the extra above basic goes into 'wants'), home/renter insurance, property taxes
health: health insurance, other medical payments, disability ins, life ins
transportation: car payment, car insurance, gas, parking, public transportation
food: basic food needs (amount over and above that, like eating out, may go to 'wants')
legal obligations: student loan payment, alimony, anything where you have a long term contract

Wants are going to be things not on that list like vacation, cable tv, internet, clothes (thinking that if you were in a pinch, you would wear what you have already), gym membership (unless you're in a contract). So it's things that if a person lost their job, they could go without.

If you do this exercise, tell me if you have a REALLY HARD time distinguishing wants and needs. To me, everything seemed like a NEED at first! :laff: ANd even now, probably some of my "needs" are actually "wants."

Kestra
4-29-12, 1:57pm
This formula always bothers me. Partly because I think saving 20% is way too conservative unless you are quite poor or busy paying off debt. I think you should save as much as you can, when and while you can, since you never know what might come later in life. Of course, leaving a bit of room for fun. I don't see how the percentages should be the same for somebody making minimum wage vs. someone making $100,000/year. Makes no sense to me.

And also because it is hard to distinguish between needs and wants. But the reverse way - almost everything I have is a "want". Yes, you need an apartment or house, but it would be possible to live in a bachelor apartment in a rough area of the city. So my apartment need may be $500-600/month. Whereas, DH and I chose to live in a nicer apartment in a nicer area so it's $1000/month. Half is a need, half is a want.
Same with transport and food. Very few people living in a city NEED a car. Yes, it is very useful and it's expected in north america. But is it a need?

I need food, but do I NEED tons of fresh produce, or coffee, or chocolate or alcohol. No.
Just as rough guess I'm probably 25% needs, 20% wants and 55% savings, right now. Of course I'm one of the lucky ones with a pretty good job - a bit above median for the area, as well as low wants. I know others aren't so lucky. But I also know I could live on minimum wage if I had too, but that would eliminate most savings.

catherine
4-29-12, 2:22pm
Gee, I just posted about this in another thread: I budget using YNAB software, and I base the budget on the 50/30/20 thing. It works great for me--but I have adjusted that proportion for my needs, because I am trying to get out of debt with as much "gazelle intensity" as I can, to use Dave Ramsey's phrase.

But I like to use those proportions as kind of reality checks. Yes, I have also used it to reevaluate and readjust. Right now my "needs" are really all the fixed expenses I have no choice in, but I am trying to reduce them. For instance, my car insurance I consider a Need--you legally have to have it. But when I see the number in my "need" bucket, I think to myself, can I reduce that? For instance, I just took off the collision, as I just also finished paying of my car loans, early.

I like having a proportion for "wants" because to me it's like a pressure valve. If I am trying live close to the bone money-wise, I sometimes feel deprived. But if I do the 30% (for me it's actually 20%), it has the effect of making me feel like I'm not working for nothing pleasurable, and that I have choices. If I want to I can spend that money on a glass of wine with my DH, or I can splurge on something above and beyond the 'basic' food budget. (I have Basic Food category in Needs and I have "splurge food" as a category in Wants).

Frankly, I never spend that 20%, but it makes me feel good when I have a little something left over at the end of the month, which I use towards my snowball after I've seen how less there is. It's really a purely psychological trick, but it works for me.

SteveinMN
4-29-12, 3:13pm
Yes, you need an apartment or house, but it would be possible to live in a bachelor apartment in a rough area of the city. So my apartment need may be $500-600/month. Whereas, DH and I chose to live in a nicer apartment in a nicer area so it's $1000/month. Half is a need, half is a want.
And then the problem becomes that the "want" is now a "need" in the sense that an obligation to it must be continued. If, say, you lost your job halfway through the lease of the nicer apartment, you still have a lease, at least until it expires or you can break it. Ditto with loan payments, if you have them -- even if it's for something not deemed a "need".

I think it would be very hard to figure that distinction into a budget.

razz
4-29-12, 6:08pm
While one may not agree with all the exact terms of the approach, it is an excellent way to get started on taking charge of your finances. So much of any change is first raising awareness or conscious-raising. Until you have really thought, examined the options and reflected on the proposed ideas and their impact on you, you will not be ready to make a significant change that will endure. This is true for quitting smoking, making a job change or taking charge of your financial health.
Good thread!

lhamo
4-29-12, 7:48pm
I agree that this may be a good way for those who are not prodigious savers to get started, especially if they have a decent but not terribly high income. But it is very difficult to separate out needs and wants in some cases -- food is a big one for us. Yes, dining out and school lunches for the kids are wants, but what about choices related to a healthier (though more expensive) way of eating? I could go back to purchasing a starch-based pantry rather than all the lean protein and fresh vegetables we eat now and reduce the bottom line on my food costs, but that would spill over into higher health costs (another need) in the long run.

Also, this is definitely NOT the plan to follow if you have any aspirations toward Financial Independence or early retirement. Unless you have a substantial income, 20% in savings (especially if that includes all kinds of savings -- emergency, retirement, college, car replacement, etc) is not going to get you very far very fast. Great goal if you are just starting out or have a relatively low income/high expenses.

By way of comparison, our rough percentages are 33% needs (of which over 1/2 is our mortgage) and 47% savings (counting only systematic, structured monthly savings into retirement and kids' college accounts, not counting employer match, and not counting the regular additions we make to our substantial "oh no DH's job has finally disappeared what are we going to do now" fund). I guess you could say that the rest goes to wants, which would be around 19%, but that "oh no" fund does take up a fair amount of that.

We have two solid middle-management incomes with good benefits, and pay relatively little in taxes due to our expat status. But aside from our over-the-top apartment (which has actually turned out to be relatively cost-effective -- we would have to pay 2-3x our mortgage payment to rent the same size and quality of apartment), we live very frugally in comparison to other expats with similar jobs/income here.

lhamo

lhamo
4-29-12, 9:08pm
PS: Just realized that I should not be calculating retirement contributions as percentage of takehome pay, as those are deducted before we get our paychecks. Redid the calculations and we are roughly 23% to needs, 33% to savings, and 44% to wants -- but a large proportion of the amount that goes to "wants" actually also goes into long-term savings.

Gregg
4-29-12, 9:17pm
If I'm completely truthful our needs would only be about 30%. It just doesn't cost us that much to live at this point in time. We kind of switched the needs and wants around and will move farther in that direction once our youngest DD is off to college in 2 years. We don't actually have that many wants right now. Its really just a few simple things we enjoy. What we're mostly doing is saving for a few really big wants that are only a couple years away: mostly travel. I don't count that as real savings when we are only setting it aside for a short duration. It just feels too temporary to be real savings (even if it technically meets the criteria).

AmeliaJane
4-29-12, 9:47pm
I read that book and liked it quite a bit. If I recall, part of the point of the percentages was to help people whose "needs" were unusually high face the fact that they might need to look at big picture things like jobs, housing or transportation alongside questions like "should we cancel the cable." The percentages might be a good way to help a couple or family negotiate to a financial plan, especially if spouses have different takes on appropriate savings levels.

Life_is_Simple
4-29-12, 9:51pm
...
I like having a proportion for "wants" because to me it's like a pressure valve. If I am trying live close to the bone money-wise, I sometimes feel deprived. But if I do the 30% (for me it's actually 20%), it has the effect of making me feel like I'm not working for nothing pleasurable, and that I have choices. If I want to I can spend that money on a glass of wine with my DH, or I can splurge on something above and beyond the 'basic' food budget. (I have Basic Food category in Needs and I have "splurge food" as a category in Wants).

Frankly, I never spend that 20%, but it makes me feel good when I have a little something left over at the end of the month, which I use towards my snowball after I've seen how less there is. It's really a purely psychological trick, but it works for me.

Catherine - I like the way you handle the Wants category. The usefulness of a budget scheme lies in whether it makes you think differently about your money. I like the way it gives you a feeling that you CAN spend on splurges if you want - the money is there. That is a brilliant way of countering the "feeling we are depriving ourselves," which can unravel good intentions.

Life_is_Simple
4-29-12, 10:07pm
I read that book and liked it quite a bit. If I recall, part of the point of the percentages was to help people whose "needs" were unusually high face the fact that they might need to look at big picture things like jobs, housing or transportation alongside questions like "should we cancel the cable." The percentages might be a good way to help a couple or family negotiate to a financial plan, especially if spouses have different takes on appropriate savings levels.
Right. Some people might be about to buy too big a house for their salary, and if they could do the calculations they would see this.

In the book, they talk about a generation or two ago, people COULDN'T get a house or car they couldn't afford, because the bank wouldn't lend them more than what their finances would allow. I remember one time I was getting a car loan, and I had to put how much income I had, how much I paid for rent, if I had any debts, etc.

It's not like that today. The financial industry *encourages* you to take on more debt than you can tolerate.

Life_is_Simple
4-29-12, 10:11pm
PS: Just realized that I should not be calculating retirement contributions as percentage of takehome pay, as those are deducted before we get our paychecks. Redid the calculations and we are roughly 23% to needs, 33% to savings, and 44% to wants -- but a large proportion of the amount that goes to "wants" actually also goes into long-term savings.
What does that mean, wants go into long term savings? Savings to buy something big in the future?

Zoebird
4-30-12, 12:56am
We are currently at about 75% needs, 10% wants, and 15% savings. As our income increases (part of the equation right now), then needs will be less of a %, savings will increase first, and then wants.

That's a rough estimate using March's numbers.

"Needs" includes my student loan payment (made monthly), but savings includes the amount we are putting into savings to pay off the debt as a lump sum, in addition to the savings that we have for ourselves. It's about 50-50 in which way the savings goes. That way it's paying off debt in one half and paying ourselves back in the other. It is what makes me more comfortable.

Itemized wants: dining out once a month; movie night/out-event every month (we don't always go, but we do budget it); "netflix" and the internet bill. It could be argued that we could cut our internet at home, but we do work from home and use it a fair bit, so it could be defined as a need. But, I put it in the want category, and we'll say that it's a want, then. :D And that is 10% of our monthly income!

ApatheticNoMore
4-30-12, 1:09am
.Seems to me with this formula is that:
- needs can easily get over 50% (part of the problem is rent on my 1 bedroom takes 25% just there).
- but OTOH wants can be kept below 30% without great difficulty.

So see you can get aftertax savings up to 20% (yea the after tax income assumption makes a really big difference), but it is by cutting the WANTS not by reducing the NEEDS so easily!

So if the end goal is just save 20% after tax. That's doable. But sheesh wish they would just say it like that. So I've never liked the formula either, really..


Yes, you need an apartment or house, but it would be possible to live in a bachelor apartment in a rough area of the city. So my apartment need may be $500-600/month. Whereas, DH and I chose to live in a nicer apartment in a nicer area so it's $1000/month. Half is a need, half is a want.

Yes but it doesn't ACTUALLY work like that does it? Sure you can live in a rough area, but ever factored in how much more it would cost for insurance on your car to do so? (at least if you have full coverage). Hmm such a real savings afterall? Never mind the greater risk of car theft (and cars get broken into frequently enough in good areas) Sure you could live an a rough area, but maybe it would no longer be safe to take walks outside, so better figure in the cost of a gym membership. It might well still pan out cheaper, but it's not actually such a steal as it initially seems.

Zoebird
4-30-12, 2:05am
For me, the issue of living in a truly rougher area is risk of harm to myself or my son.

Granted, it's pretty low violence in NZ -- not that I'd go seeking out rough areas, but we technically lived in one and it wasn't at all rough as far as I was concerned (as compared to the rough-rough areas of the US where i've been/worked but not lived). And, the rent was actually HIGHER there than it is where I am now, which is a pretty nice neighborhood -- but I pay more in transportation.

And, we do live in a small place.

That being said, for less than what we pay now, we could move back into town into a decent neighborhood -- have more space (two bedrooms plus yard) have a parking space and walk to work. Less rough neighborhood than our prior one in the city and less expensive ironically. But, there's no "view" from this place. It's in what feels like a gully, unless you move up-ridge, in which case you'll pay more for the sunny outlook (and get less space).

That being said, I do love that neighborhood because it is arty. LOL

I'm always looking for ways to cut costs. Our most recent was transportation. We got a parking space for $9 per day, and we pay $5 for gas/maintenance on the car. When we both take the bus (as we did before) we paid $18 per day. This way, we are saving $20 per week, which is not a small sum!

lhamo
4-30-12, 2:42am
What does that mean, wants go into long term savings? Savings to buy something big in the future?

Sorry -- guess I'm not being clear. What I was trying to say was that of the 44% remaining after needs and basic, regularly scheduled savings were taken care of, only a portion actually went to "wants" because in addition to what we regularly save we have a considerable amount of extra savings that goes into one of three places: 1) our Roth IRAs (which we can contribute to to the extent that we have US earned income -- we max these out in relation to that number every year); 2) kids college savings (threw in a big chunk last summer when the market was down); or 3) the "oh no" fund (which we are trying to grow so that we can pay off the mortgage early at some point.

Actually since we are only part of the way into the year I probably should use last years totals to do the estimates. In 2011, we spent 31% of "takehome" (if you include retirement contributions) on needs, 28% on wants, and 41% on savings (including 33% to regular savings and an extra 8% that was not spent on needs/wants going to additional savings).

lhamo

Life_is_Simple
5-1-12, 10:36pm
If I'm completely truthful our needs would only be about 30%. It just doesn't cost us that much to live at this point in time. We kind of switched the needs and wants around and will move farther in that direction once our youngest DD is off to college in 2 years. We don't actually have that many wants right now. Its really just a few simple things we enjoy. What we're mostly doing is saving for a few really big wants that are only a couple years away: mostly travel. I don't count that as real savings when we are only setting it aside for a short duration. It just feels too temporary to be real savings (even if it technically meets the criteria).
That is good that your needs are only 30%. Were they previously more than that, and if so, how did you do it?

Zoebird
5-2-12, 12:28am
I would say that to get needs down to 30%, one would need higher income and lower expenses. :)