topic Re: budget guides in Personal Finance

budget guides

Anonymous — Thu, 25 Oct 2018 15:16:52 GMT

I saw this article today:

https://www.self.com/story/how-to-make-a-budget-503020-rule

Do you all feel like it is a helpful starting place for someone who is very new to thinking about budgets?

I am not asking for myself. My own savings percentages are a lot higher than they recommend, but if I were to describe what I do to a "newbie" it would scare them off of even trying.

If people can suggest better intro articles or other resources I'd be delighted to see them.

Re: budget guides

kilroy8 — Thu, 25 Oct 2018 15:36:40 GMT

Well any plan is better than no plan, but 30% on "fun" sounds excessive to me. Do it like a company. You will have fixed costs and variable costs. List those, and control the fixed costs and have goals to reduce the variable costs. If there is extra, save it all.

Re: budget guides

MakingProgress — Thu, 25 Oct 2018 17:01:57 GMT

@Anonymous wrote:
I saw this article today:

https://www.self.com/story/how-to-make-a-budget-503020-rule

Do you all feel like it is a helpful starting place for someone who is very new to thinking about budgets?

I am not asking for myself. My own savings percentages are a lot higher than they recommend, but if I were to describe what I do to a "newbie" it would scare them off of even trying.

If people can suggest better intro articles or other resources I'd be delighted to see them.

Unfortuntly telling a lot of people to save 20% of their income will scare them off. So many people live paycheck to paycheck they just can't see a way out of that. For me being unemployed did it for me. I had to adjust to a lot less money and once I got a decent job again saving became easy. Not the way it should be done, but it worked for me.

Re: budget guides

Anonymous — Thu, 25 Oct 2018 17:13:12 GMT

Yeah I agree that most people live paycheck-to-paycheck, however I bet if you asked them point blank they would deny they do out of the stigma associated with that phrase.

In my opinion I unfortunately think that unless a person comes from a household that taught financial responsibility, have gone through financial hard times in the past or just find financial responsibility a hobby, people will not want to set aside anywhere close to 20% for savings. But agreed that any plan is better than no plan at all for sure

Sometimes life's little mishaps and hardships are the kick in the pants and wake-up call people need to re-evaluate their spending and how that impacts their future.

@MakingProgress wrote:
@Anonymous wrote:
I saw this article today:

https://www.self.com/story/how-to-make-a-budget-503020-rule

Do you all feel like it is a helpful starting place for someone who is very new to thinking about budgets?

I am not asking for myself. My own savings percentages are a lot higher than they recommend, but if I were to describe what I do to a "newbie" it would scare them off of even trying.

If people can suggest better intro articles or other resources I'd be delighted to see them.
Unfortuntly telling a lot of people to save 20% of their income will scare them off. So many people live paycheck to paycheck they just can't see a way out of that. For me being unemployed did it for me. I had to adjust to a lot less money and once I got a decent job again saving became easy. Not the way it should be done, but it worked for me.

Re: budget guides

xaximus — Tue, 30 Oct 2018 16:04:33 GMT

Personally, I was taught financial responsibility and to live below my means. I didn't do that initially but past few years, I have done that more then enough to cover for when I wasn't. I think it's something that should be taught in college as a mandatory class. I definitely do feel for people living paycheck to paycheck and it's tough. But as before, it's the little expenses once can minimize and save, also, start putting a few dollars aside every month. Little things like this snowball. Also, getting a side job is another option if one has the time for it. If one can start saving even 5%, that's better then nothing. Then slowly work your way up. I think it's a bit daunting and tough to automatically going to 20%.

Re: budget guides

Anonymous — Wed, 31 Oct 2018 16:29:39 GMT

I think the article's method would be a decent enough place for someone to start.

Re: budget guides

iced — Wed, 31 Oct 2018 19:03:23 GMT

@Anonymous wrote:
Yeah I agree that most people live paycheck-to-paycheck, however I bet if you asked them point blank they would deny they do out of the stigma associated with that phrase.

In my opinion I unfortunately think that unless a person comes from a household that taught financial responsibility, have gone through financial hard times in the past or just find financial responsibility a hobby, people will not want to set aside anywhere close to 20% for savings. But agreed that any plan is better than no plan at all for sure

Sometimes life's little mishaps and hardships are the kick in the pants and wake-up call people need to re-evaluate their spending and how that impacts their future.

I also lean toward this line of reasoning.

The problem a lot of people have with budgeting isn't because it's hard or complicated, it's because they lack the willingness to understand and accept where they really stand financially and live to that standard for a better future. I'll boil it down further: they lack the ability to delay gratification (the marshmallow experiment and its long-term outcomes is a fascinating side-read for those who don't know about it, by the way).

In an average part of this country, an income of $50,000 is livable, but not with luxuries. Yet, many people in that income ballpark think they can treat themselves to new cars, electronics every few years, or a spacious home (1,000 square feet is plenty for a family of 3, but good luck convincing a family in most parts of the country that they can or should live in anything less than double that). I'd even say some in this category think it's beneath them to not have these luxuries, as they believe they worked hard and are entitled to treating themselves. Of course, they are only able to buy such things by forfeiting a budget, saving, or any realistic plan for a retirement, yet still pat themselves on the back for feeling successful and/or show off their newly-acquired junk to their friends. This sense of inflated worth and impulse to experience material pleasure in the present is where the problem is, and why this group of people are unresponsive to budgeting advice.

It isn't until something happens that kicks them back to reality that they can begin to learn. Hardship has a wonderful way of reminding people of just how little they really need to live on all along. If the lesson takes hold, these people learn and are able to budget going forward. Those who don't are doomed to repeat it.

To be fair, there's also a niche on the opposite end of the wealth spectrum (a really, really small niche but one nonetheless) of people who cannot save, no matter how much they make. These are the professional athletes and lotto winners you hear about who had millions one year and bankrupt the next. The root cause is the same though: these people just can't delay gratification, and have to live the high life right here, right now. I don't think we really deal with this crowd on these forums, though.

Re: budget guides

Anonymous — Wed, 31 Oct 2018 20:55:49 GMT

Circling back to this, after all of the discussion, and agree that this budget guide is a nice place to start for someone who is new to saving; however expect some pushback on the recommended 20% to savings portion. At that point, maybe that person could start at 10% and work their way up at intervals.

I think after they have some money saved, and see how easy it is, they may consider it fun and/or motivational enough to push themselves up to 15% (everyone is different of course).

Re: budget guides

Anonymous — Thu, 01 Nov 2018 13:05:32 GMT

@iced wrote:
@Anonymous wrote:
Yeah I agree that most people live paycheck-to-paycheck, however I bet if you asked them point blank they would deny they do out of the stigma associated with that phrase.

In my opinion I unfortunately think that unless a person comes from a household that taught financial responsibility, have gone through financial hard times in the past or just find financial responsibility a hobby, people will not want to set aside anywhere close to 20% for savings. But agreed that any plan is better than no plan at all for sure

Sometimes life's little mishaps and hardships are the kick in the pants and wake-up call people need to re-evaluate their spending and how that impacts their future.

I also lean toward this line of reasoning.

The problem a lot of people have with budgeting isn't because it's hard or complicated, it's because they lack the willingness to understand and accept where they really stand financially and live to that standard for a better future. I'll boil it down further: they lack the ability to delay gratification (the marshmallow experiment and its long-term outcomes is a fascinating side-read for those who don't know about it, by the way).

In an average part of this country, an income of $50,000 is livable, but not with luxuries. Yet, many people in that income ballpark think they can treat themselves to new cars, electronics every few years, or a spacious home (1,000 square feet is plenty for a family of 3, but good luck convincing a family in most parts of the country that they can or should live in anything less than double that). I'd even say some in this category think it's beneath them to not have these luxuries, as they believe they worked hard and are entitled to treating themselves. Of course, they are only able to buy such things by forfeiting a budget, saving, or any realistic plan for a retirement, yet still pat themselves on the back for feeling successful and/or show off their newly-acquired junk to their friends. This sense of inflated worth and impulse to experience material pleasure in the present is where the problem is, and why this group of people are unresponsive to budgeting advice.

It isn't until something happens that kicks them back to reality that they can begin to learn. Hardship has a wonderful way of reminding people of just how little they really need to live on all along. If the lesson takes hold, these people learn and are able to budget going forward. Those who don't are doomed to repeat it.

To be fair, there's also a niche on the opposite end of the wealth spectrum (a really, really small niche but one nonetheless) of people who cannot save, no matter how much they make. These are the professional athletes and lotto winners you hear about who had millions one year and bankrupt the next. The root cause is the same though: these people just can't delay gratification, and have to live the high life right here, right now. I don't think we really deal with this crowd on these forums, though.

Nailed it.

Re: budget guides

Kree — Thu, 01 Nov 2018 14:41:29 GMT

Unrealistic for much of today's society.

50% on essentials? Even living in low income housing people will exceed that just on rent.

30% on wants? Only if you consider food a want.

20% savings? hahahahahahahhahaha

This is like those articles "Save 1500 a year by making your coffee at home instead of buying starbucks." Only helps people who can afford to buy starbucks in the first place.

Re: budget guides

Anonymous — Thu, 01 Nov 2018 17:40:54 GMT

@Kree wrote:
Unrealistic for much of today's society.

50% on essentials? Even living in low income housing people will exceed that just on rent.
30% on wants? Only if you consider food a want.
20% savings? hahahahahahahhahaha

This is like those articles "Save 1500 a year by making your coffee at home instead of buying starbucks." Only helps people who can afford to buy starbucks in the first place.

Hi Kree. Really appreciate your response. I am guessing that you are focusing solely on people living below the poverty line. Am I right?

If so, I think you are right that this guide is not good for people who's incomes are that low. It's certainly true that they are often trapped in a cycle where they simply cannot save money. Basically all their income is going for necessary things plus some for the few luxury items they need to still feel human. On the other hand, I wouldn't say that much of the US lives below the poverty line. It's a minority and certainly one I can't imagine reading an online guide how to save money for their IRAs and 401ks.

If you are including a lot of people who live above the poverty line, I am not sure I'd agree. I am not an especially wealthy guy (I live in a fairly small apartment, drive a beat up 2009 Ford Focus, etc.) and yet I'd say my own percentages are 40/25/35 (necessities, fun, savings). It has never been true that my rent has exceeded 50% of my takehome pay -- always been much lower. (And I lived close to the poverty line in my mid 20s.)

Many middle and upper class people may choose to spend a lot of money on homes, cars, vacations, restaurants, etc. -- such that they have no money left for savings. And the spending pattern may seem so natural that they can't imagine spending less. But that doesn't quite mean that they can't. It just requires a reorientation of lifestyle and ways to be happy.

Re: budget guides

Anonymous — Thu, 01 Nov 2018 18:15:32 GMT

#NailedIt

@Anonymous wrote:
@Kree wrote:
Unrealistic for much of today's society.

50% on essentials? Even living in low income housing people will exceed that just on rent.
30% on wants? Only if you consider food a want.
20% savings? hahahahahahahhahaha

This is like those articles "Save 1500 a year by making your coffee at home instead of buying starbucks." Only helps people who can afford to buy starbucks in the first place.
Hi Kree. Really appreciate your response. I am guessing that you are focusing solely on people living below the poverty line. Am I right?

If so, I think you are right that this guide is not good for people who's incomes are that low. It's certainly true that they are often trapped in a cycle where they simply cannot save money. Basically all their income is going for necessary things plus some for the few luxury items they need to still feel human. On the other hand, I wouldn't say that much of the US lives below the poverty line. It's a minority and certainly one I can't imagine reading an online guide how to save money for their IRAs and 401ks.

If you are including a lot of people who live above the poverty line, I am not sure I'd agree. I am not an especially wealthy guy (I live in a fairly small apartment, drive a beat up 2009 Ford Focus, etc.) and yet I'd say my own percentages are 40/25/35 (necessities, fun, savings). It has never been true that my rent has exceeded 50% of my takehome pay -- always been much lower. (And I lived close to the poverty line in my mid 20s.)

Many middle and upper class people may choose to spend a lot of money on homes, cars, vacations, restaurants, etc. -- such that they have no money left for savings. And the spending pattern may seem so natural that they can't imagine spending less. But that doesn't quite mean that they can't. It just requires a reorientation of lifestyle and ways to be happy.

Re: budget guides

Kree — Thu, 01 Nov 2018 18:53:45 GMT

@Anonymous wrote:
Hi Kree. Really appreciate your response. I am guessing that you are focusing solely on people living below the poverty line. Am I right?

Not quite. While 15% of the population lives below the poverty line, I would say my statements include people making upwards of 4 times the poverty threshold. Same people who qualify for Obama Care subsidies. With one large Caveate, Lack of spending money is not directly related to income. You will have people making under the poverty line that can use this budget, you will have people above 4x that can't.

The biggest factor is going to be location. 50 miles can be the difference between 1500 a month for a 2 bedroom apartment and 1000 a month for a 2 bedroom apartment. 100 miles can knock that down to 600 a month for a 3 bedroom house. Yet the extra 50 mile commute is not manageable for everyone. An extra 2 hours commuting (round trip), means an extra 500 a month in childcare. It means an extra 200 dollars a month in gas. Jobs don't always commute well either. Something paying 50k in the city, might only pay 30k out in the rural, so even if you save on rent/mortgage, you are no further ahead.

I'm not talking about people who choose to have expensive things, I'm talking about people who have to ride the bus because they cannot afford a car. People who haven't taken a vacation since their childhoods. There are places in this country where a person can make 4 times the federal poverty threshold, and still not qualify for low income housing because they make too little money.

Re: budget guides

Anonymous — Fri, 02 Nov 2018 18:33:26 GMT

Thanks again, Kree, for the thoughtful response.

We may be talking a bit at cross purposes. My initial post was asking whether the article in question might be a good starting place for someone who was looking to learn how to create budgets and save money.

I think you are pointing out that there are people who are in a place where they are barely scraping by and saving money isn't an option for them -- no matter how well intentioned they are and how helpful a budget counselor they had. Naturally I agree that this is so. I can think of tons of reasons that could be the case. A husband could learn that his wife or his child has cancer -- that's unexpected and is naturally going to preclude saving, indeed it will likely involve depleting savings, perhaps catastrophically.

So we are certainly agreed that people and situations like that exist, and even that there may be many such people. But I'd imagine that those people (whether the poor, the sick, the recently unemployed, etc.) by definition aren't looking for ideas for how they can save money for their IRAs and 401ks. So they aren't an audience for an article like that.

A different question is whether many people (myself included!) are often unaware of the extent that their current cost of living is the result of choices. Cost of childcare, for example, is easy to think of as something that could never be something that a person chooses: but that's because the person views having children as a cosmic necessity. Having a child is a choice; in earlier times perhaps it was less so (your options were to be celibate or have kids) but with the advent of widespread birth control options (many of them free) that is not so. In my early to mid 20s I lived very happily on a minimum wage job (though I eventually during that period got a raise to $4.95/hour) but I was able to do that because I chose not to have a car and not to have kids.

Likewise where you live (expensive city vs. cheaper rural) is a choice. Even if the job you want is in the expensive city... because that job is also a choice. Racking up gigantic amounts of student loan debt is a choice. And so on.

There's no question that some people are the victims of things utterly outside their control. A TV show like "The Wire" documents in poignant and painful detail the way children can be born into a cycle of poverty, crime, drug use, and so on that they never chose and from which it can be next to impossible to break free as they become teenagers and adults.

The issue of talking about financial choices (at least from my end) is never about blaming and attacking people who are in trouble, but rather helping us all think outside the box, the box being a paradigm of assumptions of how we have to live (no choice to live otherwise). The experience that almost all of us have who begin budgeting and saving is one of constantly reevaluating whether we this or that spending might actually be the result of a current or past choice. Certainly it has been true for me. I am still realizing ways I am spending money that seems like a law of nature until I really ask myself what it would be like if I didn't.

Those are just a few thoughts. Best wishes...

Re: budget guides

Kree — Fri, 02 Nov 2018 19:32:16 GMT

@Anonymous wrote:
Thanks again, Kree, for the thoughtful response.

We may be talking a bit at cross purposes. My initial post was asking whether the article in question might be a good starting place for someone who was looking to learn how to create budgets and save money.

Those are just a few thoughts. Best wishes...

I do appreciate your responses as well. I feel like the population I am talking about is in as much need for budgeting as others. Perhaps more so, as simple mistakes are harder to erase with future carefullness when margins are much narrower. But lets move past that as you've stated, that population isn't the intended recipients of this particular guide.

I think a good basic budgeting guide shouldn't start with percentage goals. I think it should start with advice for how to calculate DTI (net pay not gross, because it doesn't matter how much a person makes if taxes and insurance deduct before they see their paycheck. It won't help them put food on the table) .

Income and required expenses are a great way to help anyone budget better. Doesn't matter if housing is 20% or 60% of net pay, it will be accounted for for every possible scenario.

Likewise I think a good basic budgeting guide should assume housing is a fixed cost. With all the hidden costs of moving, along with signed contracts, or underwater mortgages, many people are unable to move, and I feel like the people that need a budget guide the most are also the people least likely to be able to move.

Other important information should include ways to identify a expense as "need" "want" or "frivoulous". Buying food for example. Most people would say "need", but that box of cereal might be more of a want, and that box of chocolates is likely frivoulous (unless married, in which case it might become a need again ).

Saving. Important. Especially for a lifetime budget. Everyone should have a plan for retirement, even those not currently saving need to be aware of what their financial situtation will look like in 20-50 years. But again a percentage of income is probably not the way to do it. Its artifiicial and probably only applies to a small segment of middle America. I think a better guide would help people define their savings goals. How much savings for financial security in emergencies. How much savings is needed for retirement. This will drastically vary depending upon what the person wants/needs, and helping a person define their wants/needs will be the best way to inform budgetting.

Re: budget guides

Thomas_Thumb — Sun, 04 Nov 2018 15:17:45 GMT

@Kree wrote:
@Anonymous wrote:
Thanks again, Kree, for the thoughtful response.

We may be talking a bit at cross purposes. My initial post was asking whether the article in question might be a good starting place for someone who was looking to learn how to create budgets and save money.

Those are just a few thoughts. Best wishes...
I do appreciate your responses as well. I feel like the population I am talking about is in as much need for budgeting as others.

Saving. Important. Especially for a lifetime budget. Everyone should have a plan for retirement, even those not currently saving need to be aware of what their financial situtation will look like in 20-50 years. But again a percentage of income is probably not the way to do it. Its artifiicial and probably only applies to a small segment of middle America. I think a better guide would help people define their savings goals. How much savings for financial security in emergencies. How much savings is needed for retirement. This will drastically vary depending upon what the person wants/needs, and helping a person define their wants/needs will be the best way to inform budgetting.

I think the top priority is to live within your means. Expenses need to be less than net income to provide an opportunity to save. I don't like budgets by category per se but, recognize the usefulness of that technique. I agree that saving based on percentages can be problematic but, it also has its place.

I was never able to save 20% of my income and I can understand how that advice could be off putting. Key point is to save something and start early. First step is too take advantage of a company match at all costs. Typical matching I've seen ranges from 3% to 8% of yearly wages. Saving 10% is a worthy accomplishment in my book. I'd advise starting with 10% overall including company match. Then try adjusting savings upward to 10% excluding company match.

A saving rate of 15% overall including matching funds should meet most conventional retirement needs - IMO if "properly" invested. Recommend having anything over and above company match deposited in an after tax account until emergency fund is established. Then perhaps establish a Roth IRA so earnings on future savings can grow tax free. [Of course, if FIRE by 45 is the goal then other strategies apply]

Re: budget guides

Anonymous — Sun, 04 Nov 2018 22:00:44 GMT

@Thomas_Thumb wrote:
[Of course, if FIRE by 45 is the goal then other strategies apply]

The internet is such a great tool. Forums like this and others are amazing. Better late than never. FIRE before death is my hope now though. =)

Re: budget guides

iced — Mon, 05 Nov 2018 13:39:19 GMT

@Thomas_Thumb wrote:
I think the top priority is to live within your means. Expenses need to be less than net income to provide an opportunity to save. I don't like budgets by category per se but, recognize the usefulness of that technique. I agree that saving based on percentages can be problematic but, it also has its place.

I was never able to save 20% of my income and I can understand how that advice could be off putting. Key point is to save something and start early. First step is too take advantage of a company match at all costs. Typical matching I've seen ranges from 3% to 8% of yearly wages. Saving 10% is a worthy accomplishment in my book. I'd advise starting with 10% overall including company match. Then try adjusting savings upward to 10% excluding company match.

A saving rate of 15% overall including matching funds should meet most conventional retirement needs - IMO if "properly" invested. Recommend having anything over and above company match deposited in an after tax account until emergency fund is established. Then perhaps establish a Roth IRA so earnings on future savings can grow tax free. [Of course, if FIRE by 45 is the goal then other strategies apply]

A lot of people vastly underestimate what they're going to actually need for retirement, and, as we're already starting to see today, end up being woefully unprepared for the expense of retirement.

For the 50+ crowd, a savings rate of 10% to 15% might still be sufficient in today's world, assuming those people also have appreciable Social Security contributions and/or a pension to assist. Inflation will cut into that somewhat, but that's shorter term inflation they'll deal with. They also benefit from a government programs in place that should still be around for the next 20-25 years.

The problem is beyond that.

For the younger crowd, and particularly so for those savings in their 20s and 30s, 15% as a savings rate for retirement is a little optimistic. I feel that anyone who is planning to retire in 2040 or later needs to factor several things into their savings rate that they are probably not factoring in today:

- Inflation in 20-40 years from now is going to be higher. If you think you need $1,000,000 to retire, you probably need more like $1,400,000 in 2050 dollars.

- If nothing changes, Social Security isn't going to be solvent, or will be crippled by then. If you're estimating a paycheck of $2,500/month from it, you may only see $2,000...or $0. That $1,400,000 might need to be more like $2,000,000 to off-set this.

- Health costs are only going up. I pay less than $500/year for insurance today with less than $1,000 in medical expenses for the year since I'm young and healthy. When I'm old, not so healthy, and not on my employer plan anymore, that number is likely to be closer to $20,000/year. I'm not atypical in this regard. Better make that number $2,500,000.

I'm sorry for painting a rainy picnic of a picture of the future, but I'm trying to look at things realistically. And the reality I see is that people thinking they can tuck away 6% with a 3% match and be ok in retirement, or that someone making $50,000 a year thinking $1,000,000 is a good target number when they retire, are in for a surprise when they come up short later. What some consider FIRE-level savings levels for retirement today are not that different from what younger people are going to need to do today just to be able to retire at all. Squeezing the belt as a 25 year old to put 20% away ASAP means you won't have to really squeeze as a 50 year old putting away 40-50% just to catch up. It's also ok if you can't, but don't be surprised when you find you have to keep your side-hustle well into your 80s.