Monday, December 16, 2013

Another Budget Proposal

In my humble opinion, if you have a budget, a spending plan or some other written system for managing your personal finances you are way ahead of most people.  Having a plan and working that plan, whether it is an envelope system, an Excel spreadsheet, an allowance system, etc. will help you kill debt, save more and have better control over your money.

We work off a spending plan/allowance system, but even though we have a plan that works for us I still am interested in reading proposed plans by the experts.

Mitchell Weiss via suggests the 25% plan (25% for taxes, 25% for housing, 25% for debt and 25% for living expenses).  I think his advice of planning your budget before locking in expenses is a good one.  If you are going to limit housing expenses to 25% of your before tax income, then you need to know that number before you buy a house or rent an apartment.  And limiting big expenses is a great way to free up income to kill debt or save money.

But, the rest of the advice fell flat for me.  First, I was surprised that he would include payroll taxes in the budget plan.  It is true you need to pay attention to taxes, but I think most budget plans and advice just utilize after tax income which to me seems easier.  I guess if you are an independent contractor or you run your own business this advice makes more sense since you will be responsible for taxes.

25% of pretax income for housing seems reasonable, most guidance provides for limiting housing expenses to no more than a third of after tax income.

I thought the debt advice was lame.  Sure, limit your debt obligations to 25% of your gross monthly income, but that ignores a whole variety of issues.  Maybe your budget should be set up to put more towards debt if you are trying to kill debt, etc.  And since this advice seems geared towards recent graduates it ignores the topic of student loans all together.

Finally, the last 25% of the formula is for living expenses.  But, living expenses is supposed to also include savings for an emergency fund.  Nothing in the post mentions retirement savings, so I would assume that long term savings is also supposed to come out of the last 25%.  I prefer a budget plan that prioritizes savings rather than lumping it together with living expenses.

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