By Steve Kautz, former Maine mathematics teacher and personal finance expert.
That’s right, the topic of budgeting can never be thoroughly covered. Just do a quick Google search and you’ll find a million pages of advice containing another million or so formulas for success. For now, two of my first four posts in this blog will have to do.
“Some couples go over their budgets very carefully every month; others just go over them.”
– Sally Poplin
Until I read that quote I was really into the subject matter of this post. But now I just want to know who Sally Poplin is! I love that quote, but I can’t find any information on its author other than “author.” Clearly, Ms. Poplin gets right to the heart of a classic budgeting dilemma – sticking to the budget. To sort of quote from Seinfeld, anyone can make a budget; the important part is the following of the budget. For advice on that we might need to consult psychologists rather than financial planners. Ultimately, success with your finances comes down to your behavior much more than your knowledge. Dave Ramsey, nationally syndicated personal finance guru, suggests that it’s an 80/20 ratio in favor of behavior. Obviously, that is a subjective conclusion. I would tend to agree or say that behavior might be even more important (maybe 85/15 or 90/10). Furthermore, experience will change your behavior and experience gives you knowledge…so that might be an argument to reverse the ratios (I hate when I logic myself into a corner – thanks, Mr. Spock!). However, many of us know what we should or shouldn’t do with our money, but our actual decisions betray us.
More 6th Grade Math
I know ratios are 6th grade math because I teach 6th grade math and it’s in next month’s plan. It’s important to analyze your budget in terms of some key ratios. For example, look at how much you are spending on certain categories compared to your total income. If you are working on a monthly budget you might consider your rent or mortgage bill vs your monthly take home pay. Another important category would be debt service. How much of your budget is going to paying off debt? Of course (you had to know this was coming), there are many schools of thought on these key ratios. But the experts don’t vary by much, so you can easily find guidelines that make sense to you.
4/4 People Who Like Ratios Also Like Percents
One of the more common formulas I’ve seen is the 50%-30%-20% idea. 50% or less for the necessary stuff like rent or mortgage, basic transportation, food and utilities. 30% or less for travel, clothing, entertainment/recreation, charity, etc. And the 20% would be for debt payments and savings. Elizabeth Warren, now Senator Elizabeth Warren, in her book All Your Worth: The Ultimate Lifetime Money Plan, uses the same percentages but with simplified terminology. She said 50% for “needs,” 30% for “wants,” and 20% for “savings.” Many folks connect budgeting to Maslow’s Hierarchy of Needs. We recently looked at an interesting article on the subject (from www.consumerismcommentary.com) in my personal finance class.
Those ideas are great, but there is no single approach that works for everybody. A huge factor in determining your budget ratios is what stage of life you are in, and whether you are are budgeting while on solid financial ground, or if you are budgeting on the used laptop mounted on the dashboard of your 1993 Subaru DL Wagon, otherwise known as your living room. (Yep, I had one of those. Mine was a 1980 model with 200K on it and I drove it cross country. Oh, the stories…she provided excellent 4 wheel drive traction on a gravel road in Wyoming while getting chased by some local boys). In the first case you shouldn’t be holding any debt, leaving more room for savings or lifestyle choices. If you are in your figurative Subaru, you should be building an emergency fund and paying off debt, putting aside other savings/retirement type items until you can afford to go beyond the ramen diet.
Regardless of your situation, if you are not on a budget, let’s go! Getting started is always the hard part, everyone knows. But if you are making the time to read this, I’d say you have already taken the first step.
The views, information, or opinions expressed in this blog are solely those of the author and do not necessarily represent or reflect those of the Maine Jumpstart Coalition for Personal Financial Literacy.