Elizabeth Warren Analyzes that $350K Budget that is just getting by

Posted on 10/02/2019 in misc

Not really Elizabeth Warren, but me, applying her 50/20/30 budget formula to that ridiculous $350K family budget article that has been all over social media this week. Although if Senator Warren is reading this and wants to guest post here on ODonnellweb she just needs to email me :)

If you are not familiar with 50/20/30, Warren wrote a personal finance book back in 2007ish in which she put forth the idea that no more than 50% of your monthly income should go towards needs, at least 20% should go into savings, and the balance is your fun money. That formula is how I manage my personal finances.

So let’s take a look at the $350K annual family budget from the article.

Needs

Childcare - $2450
Preschool - $2000
Food - $2129
Mortgage - $3900
Property Taxes - $1860
Property Insurance - $130
Utilities - $425
Health Care - $850
Baby Items - $350
Car Payment - $380
Car Ins and Maintenance - $200
Gas - $250
Mobile Phone - $150

Total Needs - $15074

Savings

College - $1000
401k - $3167

Total Savings- $4167

Wants

Property Maintenance - $300
Life Insurance - $170
Umbrella policy - $38
Vacations - $650
Entertainment - $500
Clothes - $400
Personal Care - $100
Charity - $300

Total Wants - $2458

Post tax income - $21,487

Spending percentages

Needs - 70%
Savings - 19%
Wants - 11%

Warren suggests that no more than 50% of your expenses go to needs, 20% to savings, and 30% to wants. Clearly this family (if they actually exist) is way out of alignment with her recommendations.

It's possible that the 50/20/30 formula doesn't really apply to this income level, but I think it does. Also 70% isn't really the right figure here for needs because presumably they could spend less on food if they really felt stretched for cash. They could probably find cheaper childcare options too. So just for fun, let's cut the grocery bill in half and cut childcare by a third. Realistically they probably waited to get into the preschool of their choice and aren't pulling the kid no matter what, so we will leave that one alone. The rest of the needs look pretty locked in. So if we shift $1800 to wants that makes the percentages 62% needs, 19% savings, and 19% wants. That is still not good.

They have no flexibility. Needs are defined by the fact that they are not flexible in the short term. If their income drops drastically, they still have to pay that mortgage, pay the tax bill, feed the kids, etc. With that kind of income you would think they have non retirement savings, but there is nothing in the budget suggesting that.

The savings rate is actually barely adequate given their income level. Maybe they have 6 months of living expenses in savings and just aren't contributing anymore, but maybe not. Again, they could be screwed with even a short term loss of income.

The wants, stuff that makes life worth living, is actually kind of low, primarily because so much of their income goes towards stuff they have to spend money on. They just spend way too much on that stuff. And I even put life insurance and property maintenance in wants, because in reality those are things you can not spend money on if cash flow is a problem. You have to pay the mortgage when you are unemployed, you don't have to pay the landscape guy though.

So I get why these people (if they really exist) feel like they are barely making it. They spend all their money on stuff that are obligations. They really could be vacationing more and having way more fun in life if they changed their priorities. And based on the budget presented (which may be total BS for all we know) they kind of are living paycheck to paycheck. The stress from that probably doesn't dissipate just because the paychecks are larger.

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