With the 40-30-20-10 breakdown above, I’m assuming this from your net pay (what you take home) and not gross pay (what you make, before taxes).

Personally, I count taxes as an expense category. Afterall, you are paying taxes out of compensation you already earned. Under this calculation, taxes takes up a good 20-25% of my paycheck already.

Setting up a budget is a good idea, but I think it’s oversimplified and the above 40-30-20-10 is unrealistic. Living expenses probably take up a much larger percentage of income in California than say, in Texas. I consider myself as a saver, but there’s no way I can save 40% of my paycheck and still live (we’re not even talking about qualify of living, but just have enough to live, period).

If you include gas and related transportation costs in the “necessary expenses”, 30% probably won’t cover it.

Does the budget above also include money you set aside for annual spendings, like car insurance, DMV registration, etc.? If it takes that into account, it would surely be over 30%. If not, where is the money going to come from when it comes time to pay those bills once a year?

Setting up a budget is a necessary for handling our finances responsibly, and I do put myself on a budget. But I don’t think the 40-30-20-10 as outline above is realistic.

@Billy
Yeah I’m talking about net pay. Actually I, personally, calculate my tithe from the gross and regard taxes as not even a factor. I don’t consider them an “expense” because it’s something that has to be done. There’s really no which way about it unless I’m a cheater, and that I am aspiring to be.

I actually don’t know about saying that it’s unrealistic just because 30% of your paycheck doesn’t cover living expenses. I mean, I suppose in that case this budget wouldn’t work out too tell. And I also don’t think that this budget is very ideal for the very rich because they have no need to live off of millions of dollars (which could be 30% of their income). I think this hits at a sweet spot in the middle class who currently live off more than they need to, and really could get by if they wanted to on less.

I do include gas, insurance, etc in the necessary expenses. And I’ll admit that I probably couldn’t do this budget myself completely. Nevertheless I’d probably say that it’s still a good goal. Can you imagine being able to save 40%? You’d have enough for a rainy day and then some! What kind of a budget do you have? I think that a huge appeal of this budget to me is its simple and straightforward approach. It doesn’t really have to deal with gross vs net, complicated algorithms to arrive at essentially the same end.

I mean, you can obviously change the numbers a little bit so that you live off of 50% of your income (still pretty good), save 30%, and only spend 10% on free expenditures. That would still be pretty healthy I’d think. What say you, Mr. Management Science? (No need to get fancy and start showing off your financial vocabulary. I’d say that the best in the business can usually translate it so that anyone could understand.)

Doing the math here, and I’m not even talking luxury if you follow along below, if one makes $100,000 a year, this 40 rule says sock away 40,000? That’s might be doable gross, but as mentioned above, taxes eat down that 100k to 75-80k. Take 40% of 80k and you’re now down to $48,000. That’s still $4,000 a month which is liveable income in most mainstream America locations.

Let’s say you live in an average home and have an average mortgage payment with average property taxes. There goes $1,200-1,500 a month in mortgage/rent payments and that doesn’t include any maintenance/upkeep costs for your home.

You need a car to get to work and even if you drive a beater car (most won’t, of course), you’ve got to give up another couple hundred a month for insurance and auto maintenance. At the low end, the $4,000 a month is now down to $2,500/month. If your commute is far with rising gas prices, you could be down to $2,250 or less.

Food costs add up unless you work as a farmer or in the food industry. If you try not to eat out very often and pack a lunch to work, you’re still looking at least $10/day per person in the family on average. A single guy gets a break, but if you’re a nuclear family of four, that’s another $40/day ($1,200/month).

Ouch, that $100,000 a year is now down to $1,300 a month and you haven’t gone anywhere but work and the grocery store. And you still haven’t paid for the utilities either. Phone? You have at least one of those. Probably a couple cell phones and there’s another $100-200 a month after fees and taxes.

Electricity, water and gas? Figure another $200/month. Now we’re down to $1,000 a month. You have to have clothes, unless you have a job that lets you show up in your birthday suit. And if we’re still talking the nuclear family of four, kids have school-related expenses. School lunches (not included in the food costs earlier). Let’s be conservative and say this costs another $150 a month for the whole family in clothes.

Now we’ve got only $850 left and we still haven’t gone out on the town or done anything fun. $850 a month sounds better than $28.33 a day, which is what that works out to be for everything else I haven’t mentioned.

Unrealistic is right. Firstly, the $100,000 will be more like $50,000 and the average median income is around $40,000, I believe (corrections welcome). The reality of a 40% savings just doesn’t pan out unless one makes more than $100,000 and doesn’t have a large family.

Re-run the numbers with $50,000 and the costs are still mostly the same, only there is less money to work with.

Either system is fine. To me, gross makes more sense to me because I see taxes as an expense, even if it’s mandatory. I also change my tax withholdings throughout the year to try to get as close to a $0 tax bill as possible. With a net system, I’d have to change the size of my take home from month to month. It’s fine as long as you stick with one.

I calculate my tithe from gross because it’s off of what I earned. Whether or not the government takes a slice off the top doesn’t that. NT never mandates “10%” and tells us to give from our heart, so it really is up to the individual.

Right now, I’m at about 25% savings, 13% tithe, 53% “necessary expenses” and 9% “unnecessary expenses”, in net pay terms (to keep the comparison with yours consistent). Necessary expenses include gas, rent, bills, and other financial obligations. I put dining out under “unnecessary expenses” because I mostly eat at home and eating out is entirely optional to me. If I buy toys (or clothes, or whatever), I eat out less for the month.

I probably make less than you, so my necessary expenses probably take up a larger proportion of my income compared to you. I’m ok with the amount I allot myself for “free spendings”; if I make more, I’d probably keep the amount relatively the same and that proportion will decrease. Or at least my “free spendings” will go up at a lower % than my raise. The extra money would probably go towards savings and paying off loans.

I believe in living under your means, but even then 40% savings is a bit excessive unless you’re saving up for a huge purchase, like a house or a car. But the majority of Americans are spending more than they make; not only are they not saving, they’re consuming borrowed money! I don’t believe in borrowing money for depreciable assets. Education? sure. House? No problem. But for a vacation? Plasma TV just so you can show off your buddies? don’t think so. The only exception I’d allow is a car.

I initially called the 40-30-20-10 unrealistic, but that was assuming a financial situation like mine, with rent and student loans. There’s no “golden rule” or a “rule of thumb” that works for everyone. Like you said, if you make 6 figures, 30% of your income is probably not devoted to housing. Even within the middle class, each person’s situation vary enough that 40-30-20-10 can work for one person and be completely unrealistic to someone else. The underlying message of all these proposed proportions is to figuring out how much you can spend before spending it, and it is definitely helpful, if not necessary, to be disciplined and good stewards of the money we’ve been entrusted.

What’s your budget like? How close are you from the 40-30-20-10?

interesting. i’m planning to lead a discussion in my small group about finances in october. ill converse more with you in email.

@TDavid
Thanks for your comment and for working out those numbers! A couple of points of contention that I have are:
1. I don’t spend $250/month on gas and I have an average commute with a less than stellar mpg automobile. It’s more like $100.
2. $10/day per person is not what I’ve experienced (although perhaps it is indeed average). If you were a smart shopper, you could get that significantly down I would think (especially cooking a lot of an item and eating that for multiple meals).

All told the idea of this budget is not to cover “average” or “required” expenses as it seems that a lot of that is just keeping up with the Jones. The idea for this budget (in my opinion) is to constrain particular areas of your spending. That might mean that a seemingly healthy income to most people would actually not cover what one would think of as the lifestyle that income deserves. Maybe that’s not a problem with the budget, maybe it’s a problem with the perception of what a particular income “deserves” to be able to do. That might sound defensive, but it’s just a point of thought. Still, your point about it being a difficult task for someone to actually accomplish is well-taken.

@Billy
Although there is nothing mandatory about 10%, I enjoy setting that since it will allow me to keep doing what I want to do. I think that often people point out that it is not mandatory simply because they want to give less, and that is not the point at all.

Thanks for explaining how you go about budgeting.

I think that the consumption of more than the income is a huge problem in America. I think that it stems from a bad mindset that thinks that everything is going to be okay in the end. There is no long-term view to be had for most. Look at current events going on like the housing and stock market instability!

For me personally, I don’t have things like student loans so I believe that I’m actually doing better than the 40-30-20-10. I don’t exactly remember the percentages exactly because I input them into my program as variables. I only see the amounts that I have in my “accounts.” However I did have to modify them before because I had alloted myself too much in certain accounts. I definitely know that my free expenditures is fairly minimal, right now, so a lot of that gets eventually dumped to savings as well. If I had to pay rent/housing costs then my necessary spending would rise some and my savings would drop down more towards the 40% as in this budget.

I think that your idea that borrowing should be limited to necessary expenditures is a good one. It seems as if there are people nowadays borrowing for items that could possibly be a free expenditure rather than a necessary one. Even getting a more luxurious car could be partly a free expenditure, in my opinion.

Some caveats to thinking that I can support this budget are that I’m single (nobody to support). Haha I’m tempted to just leave it at that.
Good discussion all in all. Thanks for your comments.

@daniel
Oh it’s always interesting to have discussions about finances. There is much to be learned, and almost all people can get interested in it because it has a direct impact on their lives. What kinds of things are you thinking about saying?

i WISH 30% would cover all my necessary expenditures

@kiki
Yeah I suppose that it is very likely that this is unreasonable for many people simply because of where they are right now. Still, what do you think of this type of limiting budgeting (where you would be constrained by preset values/percentages)?

Derek:

I got a free copy of Quicken from interviewing with Intuit, so I’m just using that. No programing skills for fancy shumancy programs with variables. But the concept is the same: it categorizes what comes in and out of your account and gives you an overview of different categories by month, last three months, YTD, or whatever. Sadly it’s a Windows version, so I did have to buy Vista (employee discount!) to run it. Mac version of Quicken is no good, from what I hear.

Having a pre-determined percentage set aside for offering isn’t a bad thing. It’s for sure helpful i but I think how much to give is something we can continually pray about, and not let 10% be the ceiling and treat it as paying my dues, and now I can move on to me type of mindset. But you’re right, most people that bring up no mandatory thing as a pass to give less and keep more for themselves.

This seems to be a very male-dominate discussion.

Daniel:

Having a proper world view of money and finance is essential, starting from how we view the money we have (”whose money is it anyway?”) to being good stewards of what we’re given. Thanks for seeing the need to teach on this topic.

There are so many topic you can discuss about this it can turn into a semester-long series.

@Billy
Yeah I mean I could have purchased some software from someone else. But there were a few reasons that I just wrote my own (which you can read in the project description if you so desire). It’s amusing that you say that you don’t need a fancy program with variables when…that’s pretty much what you’re using. It just so happens that I created mine and you paid for yours (with your time, not your money). Haha and I did not have to buy any additional software to run it. And I am going to try to make a Mac version (as well as a Windows version).

Oh I don’t mean to make the 10% as a do it and leave it kind of thing. But I do think that it’s important to have a goal in mind, rather than simply relying on willy nilly giving based on whims. That (to me) is more of a dedication. But I digress.

You’re right about the maleness of the discussion. That’s a rather amusing observation. I rather wonder if it’s just not as interesting to females or it just so happens that none commented.

I don’t think I could do it…I could maybe do it if it wasn’t for the kids, but I sort’a doubt it.

I’ve always heard that your rent/mortgage/housing could be 25%, so it would be really hard to cover the rest of your expenses with just 5%. Still, seems like if you *could* do it, you’d be pretty much set with whatever emergency came up.

Haha, I meant I don’t have the programming skills to write my own program with fancy variables.

Oh, I know why you set it at 10%. I have a set percentage too. Giving regularly and trusting that what you have left is enough requires more faith than “I don’t think I have any big purchases coming up in the next two weeks. I’ll give more this time” and “I gotta pay the bills. I’ll give less this week” mentality. I have a certain percentage set aside for giving, too. Nothing wrong with that, but it’s more about setting money aside to give BEFORE you spend it than just “10%, that’s it, end of story”.

I guess I “paid” for mine, in a way. I figured if I didn’t have to pay for Quicken, I can afford to buy Vista. I thought I’d use it more, but I run Vista like once a week just to update Quicken. Oh another great thing about it is you can download transactions directly from your bank, brokerage firm, or whatever. That’s pretty handy.

Just as important as how to “budget”, having an emergency fund for unexpected expenses is just as important. Then there’s the “how” part of savings. Where do you stash your savings? How much of it do you want to allocate as “short-term” and keep in more liquid form? And how much of it do consider “long-term” savings and can risk investing in something that could be volatile in the next few years but with a larger long-term gain, like stocks? What kind of accounts can you set up to maximize your tax advantage? etc. I think that in itself is worthy of another post.

@Jill
Yeah, supporting others would definitely put a crimp in this budget!

I do know that housing does take up a large (perhaps larger than really necessary) percentage of a lot of people’s income. However, it’s also unfortunate at times (once again just look at the current housing debacle to see how dangerous that is). What would you say that your budget would be? Does budgeting come easily for you?

In the case of being able to do it, I’d definitely agree that a huge benefit would be the agility that you gain from living such a lightweight life (in comparison to your income, whatever that may be). Emergencies, job loss, entrepreneurship, and so much more are in the realm of reasonable! Some might find great value in that, some might not.

@Billy
Oh I suppose that you’re right about not currently having the skills the code your own application. But maybe someday?

That’s interesting that you have Vista and don’t hardly run it. Is that simply because you don’t like it? I must admit that the application that I’m writing can not do anything fancy like pay your bills online or file your taxes for you. So I guess that’s a negative, but it’s also kind of the point. I enjoy it when things are boiled down to what they are. And I don’t want a budgeting program that is too complicated. I’m sure that others out there don’t either. That’s the goal of my budgeting program.

You’re definitely right about the different ways of diversifying yourself (especially your savings and investments). I like that there was a lot of discussion in response to this article (money really is very interesting to people). Perhaps I will write some more that is related. It’s definitely something that I think about and go through (as I’m sure that many people do). Thanks for the suggestion.

Do you have all of your savings and investments as carefully planned out as your budgeting? I think they’re definitely related, but I could easily see how one could be organized while the other is not. That’s kind of how it is for me. I don’t rather think that my savings and investments are entirely too well planned out at this point. Now as much as I plan out my budgeting anyways.

Derek,

Thank you for dropping by my blog.
I find yrs very interesting.
Just wonder why is 10 not in the 100 equation ?
Mine is
15 tithe
60 invest
15 travel
10 Raining day

Hubby’s side on expense mostly.

Invest on : 20 gold bar / silver gold
25 gold stocks
25 silver stocks
30 RE

Hubby on : bonds / mutual funds

Jamy