The Beauty Of A Budget

Photo credit: Louis Leray
Photo credit: Louis Leray

Many people think budgets are about deprivation. As a financial advisor, I feel they are about liberation. Here’s a simple three-step plan to create a budget that you will feel excited to follow.

Step #1: Understand the real purpose of a budget.
It’s not necessarily what you might think. The benefit of a budget is that it establishes boundaries. Importantly, these boundaries can set you free to focus on what is most essential. Let me explain. Because we live in a world with so many choices, people often think of budgeting as a constraining, joy-restricting activity. But when done correctly, budgeting actually creates a protective financial haven around you (by simplifying your set of choices) to help you make spending decisions that will enhance your joy.

Step #2: Learn what healthy spending looks like.
If you ask the average person, “What is a healthy mix between spending on needs and wants versus savings?” you will likely get a blank stare. That’s because very few of us were ever given straightforward guidelines to follow in this area.

Back in the early 1990s when she was a Harvard Law School professor specializing in bankruptcy, Senator Elizabeth Warren and her daughter Amelia wrote a delightful book called ALL YOUR WORTH. In it, they identified an optimal “balanced spending formula” of 50/30/20.  It is simple, powerful, and after all these years it’s still the most effective healthy spending rule of thumb I’ve come across. 

 The “Balanced Spending Formula” Looks Like This…

•  50 percent – the ideal amount of your take-home pay that goes toward needs
•  30 percent – the ideal amount of your take-home pay that goes to wants
•  20 percent – the ideal amount you set aside for savings

Step #3: Adjust to fit your specific situation.
While I agree that 20 percent is the ideal amount to strive to save, in this era of sky-high student loans and above average unemployment it may not be obtainable for many people right now.

For this reason, I have temporarily adjusted my thinking. Any amount you are paying for reducing student loan debt or credit card debt counts toward that 20 percent savings, if you will commit to channeling those dollars into savings after the debt is paid off.

Setting up a healthy budget with this ideal spending formula empowers you to take the first step in creating a life lived from a place of financial strength. It enables you to find that vital intersection between what is important and what you can control. Focus on that sweet spot and find your joy.

11 Replies to “The Beauty Of A Budget”

  1. I couldn’t agree more with the misconception that a budget strips joy from life; however, like you, I found that it brought peace of mind and acted as a tool to keep me focused on my goals. The end result is more joy!
    The 50/30/20 approach sounds simple and may be a great approach for someone new to budgeting. My worry is that the perception of “saving” means “spend later” to many people.
    I break saving into to distinct categories: saving for known future expenses that don’t occur monthly and saving for retirement.
    I describe these in more detail on my blog and provide a free worksheet for getting started.

  2. I prefer the term “spending plan” instead of budget. Budget is a restrictive term in and of itself. Spending plan implies bounty, plenty and self-care since you plan it to spend healthfully on yourself (which includes savings, etc.). Even just saying the two different terms leaves me feeling differently mentally, spiritually and physically.

  3. Does the 10% (minimum) I expect to give to charity come in the “wants” section? It would be nie to see charitable giving as a valid part of one’s possible “spending plan” or budget. It isn’t merely a “want” for me in the way restaurants, shopping and entertainment are. It is fundamental to my spiritual life, and actually comes before all other expenditures, even housing.

    1. Great question, Meg!
      The one downside of the 50/30/20 rule of thumb… is that it is merely a rule of thumb. So you want to feel free to tailor it to your needs. If tithing is something that is paramount, I would put it in the need category and consider possibly slimming down the wants. So perhaps your pie is 55% needs (which includes 10%+ charitable giving), 25% wants, 20% savings.
      To me the real power of the 50/30/20 rule of thumb is the subtle reminder that the pie has to add up to 100 – so if you allocate more money to one area, mathematically it has to come from another. And importantly, if you target long term savings of much less than 20% it will be (mathematically) hard to make retirement and other major life purchases like a downpayment on a home, education for yourself or kids, etc. hard.
      But absolutely – if charitable giving is a core belief of yours (and what a beautiful one that is) then put it in needs and adjust to create the personal rule of thumb that feels right in your heart.
      Hope that helps!

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