Updated on 10.05.10

# A Deeper Look at the “Percentage Budget”

One topic I’m frequently asked about by readers is the idea of the “percentage budget,” something that seems to largely come from Elizabeth Warren’s book All Your Worth, which I reviewed previously.

In the book, Warren proposes a very simple budget for people to follow, based on percentages of their take-home income.

+ 50% of one’s income should go to required expenses: housing, food, utilities, transportation, and so forth.
+ 30% of one’s income should go to covering “wants” and enjoying life.
+ 20% of one’s income should go to paying off debts and saving for the future.

That budget has a lot of appeal to it, and people often wonder why they aren’t doing it. For some people, it really does work.

However, there are some issues with it. One challenge with it that I see is that people overload their “required” expenses. Let’s look at an example.

If your household is bringing home \$50,000 a year and you have a \$1,400 a month house payment, \$500 a month in car payments, \$200 a month for insurance, \$500 a month putting food on the table, \$100 a month on gas, \$200 a month on electricity, and \$200 a month on other utilities, that adds up to almost \$40,000 a year.

In terms of percentages, such a household budget looks like this:

+ 80% spent on required expenses
+ 20% spent on wants
+ 0% spent on paying off debts or saving

In other words, the biggest problem with such strict “percentage budgeting” is that it doesn’t work well for different income levels, particularly low ones. For example, I know a teacher who earns roughly the amount described above. She’s a single mother with a house and a new-ish car. Unless there is hidden information that isn’t readily clear, her household budget likely looks something like the budget described above.

The solution is easy on paper but very, very difficult in practice: eliminating “required expenses.” How does one do that? Frugality, really. Frugal tactics seek to reduce the amount that people spend on energy, on food, on other utilities, on automobiles, and so on.

However, there comes a point where frugality no longer helps – there’s only so much meat on the bone, after all. What’s next? Downgrading your home. Selling your new-ish car and getting an old one with good gas mileage and cheap insurance. In reality, those are steps that people rarely take.

Here’s the truth: every budget, even a simple one like this one, is so deeply tied to the personal experience of the person creating it that it simply doesn’t apply to everyone. Following the budget that someone else has prescribed for you (without actually evaluating your specific situation) rarely works.

What does work? You’ve simply got to roll your own budget – in a way.

My technique for doing that was pretty straightforward. I just kept track of every dime of expenses for a month, then sat down and sorted the receipts and cancelled checks and credit card bill entries into groups that made sense to me. Then, I looked at the total of each category – as well as the pieces that made up that category – and I simply asked myself, “What can I do to curb this spending without causing too much pain in my life?”

I then repeated that over and over again until some of the changes in my life became natural.

Successful budgeting isn’t about following someone else’s specific recipe for financial success. It’s about figuring out what your real situation is, then figuring out what elements of it you can change for the better. Your life isn’t my life, nor is it anyone else’s life. Using someone else’s budget won’t really help.

1. Des says:

I’m confused about your math here. If someone is bringing home \$50k, that is \$4167 a month. (I assume by “bringing home” we’re referring to net income). That means her required expenses are 62%, her debt payments are 12% (car loan is debt), and she has 24% left for wants and additional savings. It doesn’t fit the 50/30/20 model exactly, but it is pretty close.

2. Des says:

Sorry, I meant 26% left over. (Wish we could edit comments)

3. Evan says:

I found the percentage budget to mostly just be misleading. I was trying to pay off my student loans and decided that ‘aggressive’ was about 30% of my take-home. After trying that, I realized that the most important thing is FOCUSED INTENSITY. You have to challenge yourself to make your goals happen. Be aggressive.

Those percentages might be good guidelines, or they might not. What do you want? What are your priorities? What are your long term goals and will those specific percentages get you there?

Every time I read about this method it sounds like a way to make people feel like they’re normal or doing enough. Don’t let someone else’s standards dictate your priorities.

4. George says:

@Des – 26% left over for taxes, which were not mentioned in Trent’s listing of the example budget.

5. Des says:

@George – Like I said, since Trent said this person was “bringing home” \$50k, I’m assuming it is net income. Net means after taxes.

6. George says:

The biggest problem I find with the quoted percentages in such budgets is that they ensure one has to work 25-30 years before it is possible to retire. It might be a decent way to dig out of debt, but does not expedite financial freedom unless one increases the “20% for savings/debt payment” to well over 30% (and preferably over 50%).

7. Johanna says:

Of course nobody is saying that everyone’s budget must be exactly 50/30/20. If you’ve got a very different balance that works for you (mine was something like 40/20/40, last I checked), that’s great. If it ain’t broke, don’t fix it.

But if you *are* struggling with money, comparing your spending to the 50/30/20 breakdown can help you figure out where you’re going wrong. If your required expenses eat up 80% of your income, cutting down on new clothes and dinners out is probably not going to help very much.

And whatever the breakdown that works for you, it’s tremendously important to have some amount of money for fun stuff, and to know how much that amount is. If you’re just trying to trim the “wants” as much as you possibly can, then any time you buy anything you don’t absolutely need, you feel guilty about it. That’s no way to live.

I also don’t understand what the point is of your example. That person clearly cannot afford that house (\$400/month in utilities? The place must be huge!) and that car on that income. Just because people “rarely” downgrade their houses or their cars doesn’t mean it’s not the best way to go sometimes.

@Des: The “debt reduction” category is for debt payments above the minimum payment. If \$500 is the minimum on the car payments, and they’re not paying anything extra, then that entire amount counts as “required expenses.”

8. Mary says:

I loved All Your Worth. This method works much better for me than anything else I’ve tried.
The problem for many of us is that we’re living above our means & when you use the percentages in the book that becomes very clear.

9. Johanna says:

@George: People who are already saving 30% or more of their income are not the target audience of this book. In fact, the book explicitly says as much. (But I bought it anyway.)

10. Ray says:

What if you can “split” items across categories?

For example, if you have a new fancy car and the payment is \$800 a month, but you only NEED a car that was \$400 a month, put \$400 into “required” and \$400 into “wants.”

My wife and I have been doing a variation of this for household expenses for some time. We need a new dishwasher. The “good enough” model is \$400. The one my wife wants is \$700. The household will pay \$400, she has to come up with the extra \$300. She gets the fancy dishwasher, and I only have to pay my share of a normal one.

11. Charles says:

@Des, I haven’t read the book but I don’t think you can categorize car payment as debt. If that’s the case, then house payment should be considered as debt. I think typically when people refer to debt, they’re talking about unsecured debt, meaning debt not backed by a major asset like home or car. So credit card debt and personal loans, school loans, and such fall into this category.

12. Holly says:

That’s where I seem to be wishy-washy…exactly what should I consider a required expense vs. debt vs. wants.

For example, all 3 of my children need braces. I am given a 24 mos. payment schedule for each child. Would that be a want or a need or a debt (their primary dentist didn’t exactly require that I afford them the braces, but their teeth are crowded w/an overbite, etc.)?

Also, I send them to private school because almost every one of the public schools where we live is unacceptable due to the poor performance on our state’s tests. The only ones that aren’t below average are the charter schools at which you have to be lucky to be accepted (lottery. etc.). Is that also a want?

13. Stan says:

@Johanna, post 6: Agreed. I think the 50/30/20 breakdown Warren lays out makes sense in so many ways.

14. Lucas says:

I really enjoyed the book and keep a spreadsheet each month to see what percentages we (my wife and I) are at (we also keep a separate budget in YNAB). We are currently at 30/22/48 (n/w/s) for 2010. I enjoy checking the percentages just to ensure we don’t get out of “balance.” It is also a good check to ensure we are maximizing savings (or paying off debt).

15. Johanna says:

@Holly: The way the book breaks it down, if you’re under contract to make a payment, even for something as unnecessary as a gym membership, then it counts as a required expense. If your children already have braces and you’re making the payments on them, then it’s a required expense. If they’re already in private school and you can’t easily take them out (at least until the next school year), then I’d say that that’s also a required expense.

16. Jackie says:

I almost agree with Johanna on #6. Unfortunately, MANY people are unable to downgrade their houses without foreclosure.

17. Briana @ GBR says:

This post just inspired me to do a percentage budget. I tried the 50/30/20 and it didn’t quite work for me, so I just did the math for 60/20/20, and it works perfectly! Combining that with automated payments, I think things are going to go a lot smoother for me :)

18. MikeTheRed says:

I just ran the numbers personally and it came out to 39/22/39 on average.

And honestly, that’s with a lot of wasteful spending. If my wife and I actually tried to be more frugal and cut things like eating out, we’d be able to trim some of those “essential” costs a bit and probably get the savings number up to closer to 50%.

The single biggest help to the budget is our housing is pretty darn cheap. A decent apartment near to work for under \$750/month really takes a huge weight off of our financial shoulders.

The way we make this work is we put away that 39% every month immediately as if it were a bill. We then live off of the remainder.

19. Kim says:

Trent I think you are forgetting that newbies and even some who have been around for awhile need these types of Rules of Thumb to start their way onto getting themselves grounded financially. If you make it too complicated, people are going to ignore the advice. And these ratios are not new to the book. Liz Pulliam Weston recently discussed it in one of her columns:
http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/how-much-should-you-spend-on.aspx?page=1 .

20. Johanna says:

@Jackie: That’s a good point. Unfortunately, the book doesn’t offer any advice for what to do in that situation, since it came out in 2005, before so many people went underwater on their mortgages. Maybe Elizabeth Warren has written something about it since then.

21. Kyle says:

A great FREE tool for getting a handle on how much you spend and what you spend it on is mint.com. I’m in no way affiliated with them but I absolutely love it. I can’t imagine trying to keep track of every receipt and canceled check, necessary if you have to but with mint you don’t have to! Anybody trying to get a handle on where they are spending their money should take a look at it.

22. Bill says:

The first time I heard about this it sounded like a great idea but I could never figure out how to figure in pre-tax investing like 401(k). Does the book address this?

23. jim says:

I haven’t read the book so I’m not sure exactly how the authors expect the 50/30/20 balance to work. But to me it seems that if you can’t quite swing that then you can figure where you’re at and then work towards hitting 50/30/20 as a goal. And isn’t part of the idea to recognize that things like \$500 new car payments are more “want” category than “need” category? You may need a car but you don’t need a new car.

24. jdmitch says:

I’d agree with Jim. Most people’s problems with living in this setup is misclassifying wants as needs.

Also, car debt would never be “paying off debt”. Paying off debt are debts you can’t readily get out of (as would be down grading your car) but have stopped using (aka, credit cards you’ve cut up).

25. Ryan says:

Making your budget that’s unique to the person is definitely the way to go, regardless of the percentage. As presented in “Your Money or Your Life”, as long as you’re spending where you happy in terms of life energy your budget should work out fine!

26. Johanna says:

@Bill: Yes – you add the 401(k) amount back into your take-home pay, and then count it as “savings.” Same goes for health insurance or anything else you pay for with pre-tax money – add it back in and then count it as a “need.” In other words, your “after-tax pay” (out of which you calculate the 50%, 30%, and 20%) is your gross pay minus *just* the taxes.

@jim, @jdmitch: For the purposes of this exercise, the whole car payment gets counted in the “needs” category, no matter how fancy the car is. Not that your point isn’t valid, but that’s just not how the categories are being defined. If it bothers you, you can call them “committed spending” and “flexible spending” instead of “needs” and “wants” – that might actually be closer to what the authors mean, anyway.

27. Sara says:

Some expenses kind of overlap needs and wants. For example, clothing and food are definitely needs, but expensive restaurant meals and designer clothing are not. Most people are somewhere in the middle and spend more than the bare minimum, but not excessively. A car is another one — anything that runs will take care of the need to get to and from work, but some people want to spend more for a nicer car. My numbers come out to about 35/5/60, but if I consider any spending beyond the minimum to meet my needs as a want, it’s probably closer to 30/10/60.

28. ranch111 says:

It’s the car payments that kill people. Does it every time. The cable TV bill, cell phone bill and all the other “needs” that people have. 40% of my salary goes into savings of some sort. The mortgage payments also adds to our savings. I can live without all the things most people want, and that’s the key to becoming wealthy.

29. Lesley says:

Thanks for pointing put that the percentages don’t always work for people with lower incomes–I always end up walking from that type of advice feeling horrible because my breakdown is more like 80-10-10. And that’s with no car payment.

30. Kathy says:

I think one of the most important principles of Warren’s system is that if you can hold your needs/committed spending to around 50% of your take-home pay, you could absorb a 50% drop in your income without courting immediate financial disaster, even if you don’t have an emergency fund (not that she recommends not having an emergency fund….). If your mortgage, groceries and car payment have you maxed out every month, it only takes a small financial setback to get you into hot water quickly. In other words the 50% guideline is a way to keep you living within your means–which you are not doing if you have no wiggle room, even if you aren’t living on credit cards or blowing money on frivolities.

You really need to read the whole book to “get” the system, and you have to do the worksheets–it’s not quite as simplistic as just assigning percentages. At first, it’s hard to shift your thinking so that you consider clothing a want and not a need (yes, it really is!). And the authors address the issue of some food being a need and a lot of other food being a want in a sensible and practical way.

This book was seriously a life-changer for me. I’m a single mom and tend to worry a lot about money, but this method eliminated a lot of anxiety and helped me relax a little.

31. Leen says:

I really loved this book and found it excellent. I was lucky enough to find it before I bought a house and before I bought my last car. My husband and I have take home pay of about \$40,000 which is less than Trent’s example. And our needs are at about 52%. How? We bought a smaller house that we could actually afford so our mortgage payment is only \$542 a month. The electricity is only \$90 a month. The oil bill (and we live in Canada) is only \$100 a month. Our property taxes are only \$100 a month. We used the book to figure out what we could afford for a house and stay in balance instead of believing anything the bank said. We saved up money and paid cash for our car so we wouldn’t loose that cash flow monthly. It isn’t something I check every month but once in a while to make sure we aren’t out of whack. We save more than 20% but we have lots of fun on our fun money even though our “wants” contains about \$170 a month for charity. I don’t think we are especially frugal. We just got locked into a situation (ie the house) that we could actually afford. I do agree with Trent that people who pick up this book that already have a car payment and a house that they can’t afford are unlikely to become balanced. I am really glad that I picked it up when I was still renting. We have been in the house for just over a year and we are so glad that we didn’t buy more house. A bigger house is just more to heat and clean!

32. getagrip says:

I haven’t read the book, but it seems to me that the 20% for savings is low. If you are saving for retirement, it’s recommended you save 15% now a days, at a minimum of at least 10%. If you then add saving for college for more than one child, saving for a house downpayment, home improvement, future next car, or any of your other longer term goals, etc. I can’t see how the percentage would be 20%. If anything the 30% and 20% should be flipped for most people with kids.

That said I do think it’s a good idea to see where you’re at in the sense you need to consider the balance in your life and anything that lets you examine what are your real “needs” versus your “wants” can help with that.

33. Interestingly, I think the reader comments underscore your entire point! People often “cannot see the forest thru the trees” when it comes to budgeting. Instead of seeing the real issue (knowing where your money is and managing it), they get caught up in the minuetia, ultimately leading to frustration and abandoning the act altogether. Budgeting really just boils down to common sense. No one formula is a fit for everyone. And to that end, your financial situation will evolve overtime. It may be that every few years, you need to explore a totally new approach.

34. One of the things I would recommend to anyone who is serious about managing their personal assets and cash flow by using a budget is to run the numbers using all the various methods they can find. My book is includes The Minimum Basic Budget that is centered on zero based budgeting strategies.

Each budgeting method has it’s own strengths and by applying various types you can spot different areas of improvement, ways to cut expenses, or find money to save. Personal finances is a living thing in that it reflects the lifestyle of the owner. The percentage budget is one often used by bankers to insure a person can afford something. We know they are highly profitable so if we use their tool we can gain some valuable insight also. But don’t stop there, keep going…

35. Johanna says:

@getagrip: Again, you’re describing a book for a very different audience. Warren and Tyagi are writing for people for whom saving 20% may seem like a daunting goal. If you told them right away that they need to get to 30%, they might not even try. You have to walk before you can run.

And again, even though the categories are called “needs” (the authors actually use the term “must-haves”) and “wants,” this is not quite the same as the usual needs-versus-wants exercise (which in my opinion is fairly silly anyway, since there’s very little that you actually need to survive).

36. reulte says:

Hmm – i haven’t read the book but I think I’ll check it out. I like the committed/flexible spending categories suggested by Johanna better than the needs/wants because so many people really do define their wants as needs.

My ‘committed/needs’ category has been about 70% for the last few months but that does include a rent of \$1200/month (considered high by me but check my note below) and dining out because I don’t break my food catagory down. I have no debt and my retirement is automatically set at 27% of my gross salary and auto-deposited (which I guess would be considered at above the 20% for savings as suggested by Warren/Tyagi). My emergency/one-day-I’ll-buy-a-house fund is well above 2 years current expenses. Once I reach a certain amount in savings, I put about 2/3 of it into retirement where it no longer gets counted in my monthly budget. Some years I can save enough to get two or three savings to retirement interactions. Sometimes only one. I think I’ll start working on a budget because although I have sufficient money for retirement and in savings; at present I don’t really have an idea of where my money goes on a daily basis. I can see that I’ve been saving about 20% of my take home pay, but I’d probably have to go over my credit card receipts to find out how much I spend for groceries vs water bill vs doctor visit. Always a good idea. (and yes, I use my credit cards for every thing – except rent & water – and pay them off entirely each month). I just recently used my credit card oints to receive a \$500 check.

Holly — If your children’s teeth are overcrowded and the dentist requires braces, I’d really get a 2nd opinion. Although your dentist doesn’t seem to require them. As the children grow, so will their jaws. Recent research has suggested that getting children’s teeth corrected at an older age (i.e. teenager, young 20’s) is no better or worse than getting them corrected at a younger age except that some children ‘grow into their teeth’ and don’t need braces or don’t need as much correction. And yes, private school is a want; maybe a committed want but a want nonetheless. When I was sent to this town (I travel a lot for work), I researched and then moved to a specific area in the best school I could find. A good school may be a want, but it is a priority want.

37. valleycat1 says:

A mistake I made in the past was to budget ‘needs,’ then ‘wants,’ and THEN savings/debt repayment from the leftovers. The percentages above are listed in descending order of percentage, not priority. So I’m not sure why the example is 80% needs & 20% wants – a portion of leftover from needs could go to savings.

Once you’ve got inflexible/need expenses going, then the order of consideration for budgeting would be needs, then savings, then wants from what’s left. Savings would be based on your personal comfort level in conjunction with the amount available. And, yes, I know it’s ‘pay yourself first’, but before you can do that you need to figure out how much you have available to pay yourself first.

Apparently from the comments (I haven’t read the book), when you’re considering ‘wants’ you need to be sure that if you’ll be making long term payments on it, you evaluate how that will increase your ‘needs’ percentage upon purchase – which would make me reconsider whether it’s a need or a want.

38. Andrea says:

My issue with percentages on paper is that, while thjey are often a really good guide, they are rarely going to work for absolutely everyone!

They don’t account for emergencies andunexpected expenses that crop up….

39. Johanna says:

Another thing about the book itself: The big reason I bought the book even though I’m not part of its target audience is that it contains some of the most intelligent and compassionate personal finance writing I’ve ever seen. The authors manage to present their advice without sounding preachy, condescending, or snake-oil-salesmany. And they say a lot of the same things Trent does (e.g., stop blaming other people and focus on what you can do for yourself) without sounding at all obnoxious about it, at least to me.

I think that anyone who writes about personal finance with the goal of helping people who are struggling could learn a lot from Warren and Tyagi’s writing style.

40. Nurk says:

The at most 50% Must-haves is not taken out of thin air:

“Suppose you get laid off. . . . With Must-Haves at 50% of your previous salary, your unemployment check could cover your needs for several months. Likewise, if you were in a serious accident and couldn’t work, most disability policies would cover about half of your salary, so your basic needs would be met. And if you are married, keeping your Must-Haves at 50% means that you could get by on only one paycheck for a while.”

For a more detailed explanation of the Balanced Money Formula: http://www.mdmproofing.com/iym/BMF.shtml

41. JJ says:

Am I the only one who mentally adds “…are belong to us” after the title of this book?

Anyway, I’ll have to disagree with Trent too. I think it’s perfectly reasonable to assume that, if your “needs” are more than 50% of your take-home pay, you might have over-extended yourself (too much house, too much car, etc.) and that steps to “unextend” yourself (and/or increase your income) a bit are worth considering.

It’s also a good tool for “what if” scenarios. Is the payment on that house you’re looking at too much? If it brings your needs to over 50%, you should probably look at something cheaper. It’s really just a more general version of Ramsey’s rule that a mortgage payment should be no more than 25% of your take-home pay.

JJ

42. Courtney20 says:

I think the 50/30/20 is a great exercise, but it’s still confusing for some things (disclaimer: I have not read the book itself). For example, how are designated savings accounts classified? We currently save \$200/month into an account for “car maintenance” (no car payment). Is that a need, since at some point my car will need an oil change or transmission service, or is that savings? What about 401K matches from my employer?

43. Jackie says:

I appreciate comment #25, but I have another minutia question. How do you count things when you spend your savings? Say you save \$100/month for vacation then in the summer spend \$1000 on vacation. During non-summer it counts as savings. Once spent it counts as a want? When it’s all said and done, the money went toward a want but people call it savings. Same question about saving up for needs.

44. jim says:

LOL @ JJ #31

45. Johanna says:

I think that Warren/Tyagi say to add employer retirement contributions in to your after-tax income, and then count them as savings. (So if you put \$100 into your 401(k), your employer matches it with another \$100, and you take home \$1800, then your “after-tax income” is 1800+100+100 = \$2000, and you’ve got \$200, or 10%, in savings so far.) But I think there’s also a lot of sense in the argument (is it Dave Ramsey’s?) to plan your savings as if your employer match didn’t exist, since it can be taken away so easily, and you want to be able to save adequately on your own.

I think they also say that if your expenses (or income) fluctuate from month to month, you should take the average over a year. So if you spend \$1200 once a year on vacation, that’s \$100/month toward wants. For expenses that are less frequent than that (like replacing your furnace), I’m not sure what (if anything) they say to do. But again, I don’t think the book is really aimed at people who are thinking far enough ahead to be saving up to replace their furnace.

46. reulte says:

Jackie – Was I #25? I use my saving as a buffer; I don’t really count it in my (very vague) budget. For instances, about a month ago I realized that I hadn’t done anything in my savings for a about a year and it had about \$17K in it – which I consider too much to have in a low-earning savings account. Contemplating the upcoming holidays and a fairly large amount I had just put on my credit card, I decided to remove \$14K into the retirement funds and keep the \$3,000 in the savings – \$1,000 for the holidays (gifts & travel), \$1,000 for 2 yearly passes to Disneyworld (Florida resident) and \$1,000 because that’s the minimum I keep there. Still, this has very little to do with my monthly budgeting which comes out of my salary. Simply by habit, experience and automatic deduction, I set my accounts up so that I have enough money every month and I don’t have to watch my daily or monthly spending very closely. When something changes drastically (ie – I move overseas or get a raise), I go though and make sure to compensate for the differences that will cause.

47. Amanda says:

@ 23 I agree!

People need to learn to think that way in general. We were approved for a 400,000 mortgage. No way we can afford that but I think most people believe their lenders are telling them the amount they can afford. People don’t know how to do much math and I think this example 50/30/20 might help.

When I first heard this example the budget I was using happened to be 50/20/30 and I felt quite comfortable w our entertainment & travel.

48. Rather than setting yourself goals based on percentages, I owuld rather approach the problem like a bull in a china shop, so to speak.

If you’re in debt, then your wants should be real close to 0% of your budget–until you get out of debt.

Then, you can adjust it upwards.

If you set yourself to a budget based on percentages, I think you’re liable to give up some progress you could make towards paying down your debt.

49. Johanna says:

@David: The problem with simply trying to set your wants “real close to 0%” is that it makes it more likely that you’ll give up. Maybe there are some people who can go for months on end without spending so much as 50 cents on a candy bar, but most people cannot, and asking them to try is asking too much.

If you really want to go all-out in attacking your debts, at least give yourself 10% or 5% or 2% to spend on fun stuff. If you don’t like percents, make it \$200/month or \$50/month or some other amount. Whatever it is, give yourself permission to spend that money however you want without feeling guilty that you’re taking money away that you “should” be using to pay your debts.

The psychological difference between “I will go to the movies (or whatever fun thing you enjoy) once a month” and “I will go to the movies never” (or “as little as possible”) is huge. And a big part of Warren and Tyagi’s point is that when you set clear boundaries, and give yourself the freedom to do whatever you want within those boundaries, it’s a lot better for your well-being than if you have no boundaries.

And if spending 2% of your income on movie tickets makes *that* big a difference in how long it takes you to get out of debt, that must be because you’re just barely able to cover the interest on your debts, which means you’re in deep enough trouble that you might be better off declaring bankruptcy.

50. Steve in W MA says:

Okay, but if you can’t get to the point that you are saving 20% of your income for your long term needs (like retirement) before the time you are, say, 30, then you need to do something about it. That’s where having guidelines like 50/30/20 can be helpful.

I think a more effective approach though is to determine the amount of money you’ll need in the future (say, for retirement or for the kids’ education) and put a plan in place NOW that, when followed, WILL meet those goals by the time they come due. Percentage plans like those described above are, in my view, an attempt to give general guidance to people when they haven’t done any real long term goalsetting. In that sense, they are useful. But they are not the last word.

If you aren’t going to have enough for retirement at your current pace of saving, that’s EXACTLY the time to consider radical changes. And without setting those goals and making the right projections, you won’t be able to see if you need to make adjustments.

51. Steve says:

Your example household is exactly the type of situation this advice is aimed at. This household has too much house, too much car, and is spending too much on electricity and food. I know people with “required” expenses eating up 100+% of their after-tax income. There’s no way you can get ahead that way, you will tread water indefinitely – at best. The example household needs to cut expenses drastically, increase income, or both.

I don’t dispute that there are people and households out there with so low of an income that they have their expenses cut to the minimum possible and it still takes up all their income. Your example is not one of those.

52. Elden says:

Interesting reading the blog to this point. I suggest that anyone honestly desiring a solution to their personal finance dilemma should visit DaveRamsey.com