Balanced Money Formula: wants, needs and savings

A past article in Get Rich Slowly discusses the The Balanced Money Formula. This is a budget idea presented by Elizabeth Warren and Amelia Tyagi in the book All Your Worth: The Ultimate Lifetime Money Plan. The basic concept for the Balanced Money Formula is that out of your net income (after taxes) you should aim to spend 50% on your 'needs', about 30% on 'wants' and save 20%.

When they talk about needs, wants and savings they mean:

• Needs are the things you can't go without and include: Housing, food, clothing, transportation, etc.
• Wants are the items that are luxury in nature and that you could cut back if you needed to. Wants include eating out, cable bill, movies, vacations and the like.
• Saving is any money you retain in an investment, put in the bank or put towards retirement.

This may seem obvious but part of personal finances is sorting out the wants and the needs. Many people feel they "need" things that they really don't and should treat more things as luxury "wants".

For our own budget I figured out the percents and we're putting roughly 36% into 'needs', 27% into 'wants' and 38% into savings. Our money usage:


So by this measure I'm doing much better than goal. I'm saving a lot more of my net income than the goal. If I had a lower income then this might be considered in some eyes as a bit too miserly. You don't want to save so much that you end up skimping on necessities and end up having no fun at all. Generally though my saving % looks a lot higher cause I have a relatively high income level and I've minimized my spending on the 'needs' category. I don't have car payments and my home mortgage is only about 19% of my net income. We also minimize most of our bills and are fairly frugal about spending in general. In other words we're living well within our means. This is one of they fundamental keys to being successful financially.

Our spending on 'wants' is fairly healthy. We spend nearly the 30% that the authors suggest. Thats a pretty large amount given my income. I personally think that spending some money on 'wants' is healthy. You don't want to be so frugal that you deny yourself any fun. Striking a balance between saving for the future and enjoying life in the present is important.

I like the concept of the Balanced Money Formula. It allows you to track your finances with a budget mindset without going into so much low level detail as most budgets. I figure as long as you're saving 20% of your income or more then you're doing fine.

History of new car costs and average inflation

CPI data

The Bureau of Labor Statistics tracks the Consumer Price Index. One of the prices they track is new vehicle costs. THey have data on prices for new cars dating back to 1935. The following is a graph of the price index from 1935 to 2007:

You might notice the gap in data points during the mid 1940's. This was the period during WWII when US production of personal automobiles was halted in order to use manufacturing capacity for the war effort.

From 1935 to 2007 vehicle prices rose 2.7% average annually. For the last 20 years during 1987 to 2007 prices have only risen an average of 0.9% per year.

Looking at individual decades the annual rates were:

1940's	6.8%
1950's	2.3%
1960's	0.3%
1970's	5.2%
1980's	3.2%
1990's	1.4%
2000's	-0.4%

Yes prices are actually going down this decade. That is a reflection of people buying smaller and more affordable vehicles.


Prices versus wages

The company Comerica tracks auto affordability. One way they look at it is to put new car prices in relation to wages. The chart below, from this report from Comerica, shows the number of weeks worth of median wages that an average consumer would have to work to afford a new vehicle:


Spot check on prices in 1949 versus 2008

If you look at actual car prices from 1949 as listed in The Peoples HIstory, you get real world values. They list 14 prices for 1949 ranging from $1,472 to $3,497. The average of the prices given is $2,680. In 2008 prices range from $10,235 at the low end for a Chevy Aveo to a very high figure for exotic luxury imports. The average price for a new car in 2008 is $27,704 according to Comerica.

If we compare the low prices of $1,472 in 1949 to the low price of $10,235 in 2008 that would be an average annual increase of 3.3% If we compare the mean prices of $2,680 in '49 and $27,704 in '08 that gives an increase of 4.0%

This method and the resulting numbers should be taken with a grain of salt. The prices for 1949 given in the Peoples History are only a handful of data points so this is not that reliable of an estimate and the margin of error for that is higher.

What do you get for your money?

Another important aspect of new car prices to consider is how much vehicle you get for the price. Its reasonable to say that today's car is twice as good as a vehicle from the 1940's. Cars last longer, have more power, get better fuel economy and are safer.

One example is a 1949 Lincoln Cosmopolitan convertible. The car cost $3,948 in 1949. It had a V8 engine that got 152 HP and 8 miles per gallon. There were no airbags, no seatbelts and few modern features.

Today in 2008 you can get a Mazda Miata for $20,635. The Miata has 166 HP and gets 22 MPG city/ 27 highway. It has front side airbags, anti-lock brakes, an AM/FM CD player and remote entry as standard features.

The Miata will likely last twice as long as the Cosmopolitan. In the 1950's to 1970's a car would not be expected to last over 100,000 miles. But todays cars should last for 150,000 to 200,000. The new cars are MUCH safer. If you look at fatality rates per miles driven, from 1966 to 1996 the fatality rate per 1 million miles driven dropped from 5.5 to 1.7.

By every objective measure the Miata clearly performs better. It lasts twice as long, it is much safer and it has better fuel efficiency.

Restaurant.com $25 certificate for $4 plus free $10 certificate ends Thursday Nov 13

THIS OFFER HAS EXPIRED

There is a new promotion for Restaurant.com certificates:

Save 60% off $25 Gift Certificates and receive a Free $10 Gift Certificate. Use code HARVEST and pay $4 through 11/13/08.


The promotion ends on Thursday November 13th.

I have used these at my steak house in the past and they worked great. But if you're interested in getting them then first: Check the Restaurant.com site and see what restaurants in your area take the certificates. Second check out the rules and limitations for the gift certificates. For example my steak house requires a minimum purchase of $50 to use the $25 certificate and they require a mandatory 18% gratuity. Lastly I wouldn't recommend buying them unless you plan to use them shortly. The restaurants that accept the certificates can change over time.

For more on saving money at restaurants see my older posts:

• Saving at restaurants #1- discount programs

• Saving at restaurants #2- birthday & email club discounts

• Saving at Restaurants #3 - using gift cards

• Saving at restaurants #4 - general frugality

Updown : down -16%

My Updown performance has been pretty poor lately. I'm down 16% total since March when I started. The S&P 500 is down almost 30% for the period while the Dow and NASDAQ are both off about 28%.

Only a couple of my stock picks are positive overall right now. AT&T and Walmart are both up roughly 3% from what I paid for them.

I put around $280k into about half a dozen REITs and they have lost around 20-20% so far as a group. Buying the REITs was a long term investment with the assumption that the REIT market would recover in a couple years and in the time being their high dividend yields would help add to my returns. The REITs are yielding 15-30% each from dividends.

While my performance in Updown hasn't been anything to brag about lately, I think its a fun game and helps me learn more about picking stocks.