Your Money_ The Missing Manual - J. D. Roth [21]
Tip
When creating a budget, think of savings and debt reduction as interchangeable. While you have debt, your main focus is to get rid of it—saving money is secondary. Conquering debt takes time, but it can be done. See Chapter 4 for debt-defeating pointers.
This budget framework lets you save for the future and have fun today. The authors insist that to maintain financial balance and be happy, you can't spend more than 50% on needs (spending less than that is even better). For example, if you take out an enormous mortgage and overload yourself with a bunch of monthly bills, you'll feel swamped and unhappy.
Tip
You can think of financial happiness as inversely related to how much you spend on needs: The lower your needs, the higher your happiness. (See Living a Rich Life for more about how expectations affect happiness.)
Warren and Tyagi say most budgets fail because they don't leave room for fun. Their formula lets you spend 30% of your money on the things you want, with no restrictions. So spend it all on baseball cards or a trip to Europe if that makes you happy. The final 20% of your income should go to savings—or debt reduction.
Finally, let's look at a budget framework shared by Richard Jenkins in an article for MSN Money (http://tinyurl.com/60pct-solution). After 20 years of budgeting, Jenkins decided that a detailed budget was too much work for too little information, so he developed a simpler framework.
Jenkins's goal is to keep committed expenses manageable. (Committed expenses are the wants and needs you can't or won't compromise on; you're committed to them.) He suggests allocating your monthly gross (that's pre-tax) income like this:
60% to committed expenses like taxes, clothing, basic living expenses, insurance, charity (including tithing), and regular bills (like cable).
10% to short-term savings for things like vacations, home repairs, new appliances, and so on.
10% to long-term savings including car purchases, home renovations, emergency savings, and paying down debt.
10% to retirement savings through Roth IRAs, 401(k)s, and the like.
10% for fun money you can spend on anything you want: hobbies, dining out, whatever.
Figure 3-2. The 60% Solution
When your committed expenses rise, so does your stress level. So Jenkins says that the best way to relieve money pressure is to reduce committed expenses: cut the cable TV, spend less on clothing, reduce your rent, and so on. If you can keep these costs under 60% of your income, you'll have more money to spend on other things—like having fun.
The budget frameworks listed in this section are starting points, and if you follow them, you'll be in good shape. But there's no reason you can't do more by going beyond the percentages they suggest. If you choose the Balanced Money Formula, say, and you can reduce your needs to below 50% of your income, great. If you can get them down to 40% or 30% of your income, that's even better.
Next, let's take a look at how you can use these frameworks to build an actual budget.
Budgeting in Practice
Budget frameworks can help you wrap your head around the big picture, but most people need at least a little more detail to create a budget that'll actually help them change their spending habits. Whereas budget frameworks have broad, general categories like savings, wants, and needs, actual budgets usually have specific categories like groceries, car payment, mortgage, and so on.
How can you decide what categories to use? One way is to get ideas from budget templates, which you can find online at places like http://tinyurl.com/ramseybudget and http://tinyurl.com/googlebudgets, or in books like Mary Hunt's Debt-Proof Living (DPL Press, 2005) or Dave Ramsey's The Total Money Makeover (Thomas Nelson, 2003). But it's important to not just blindly use a budget that belongs to somebody else; your budget should fit your life. You may want to use your budget to:
Track problem areas. Do you buy a lot of music or spend too much on dining out?