It is a truth universally acknowledged that a young man (or woman) in possession of a desire to better his finances must soon be in want of a budget. A big chunk of personal finance literature is devoted to teaching how to examine what is coming in (let’s call it “X”) and then how to divvy up X into different budget buckets. These buckets are assumed to be a certain size. Housing is 25-35%. Food is 10-15%. Transportation is 10-15%, etc.
All well and good, but a wee bit boring. What’s more interesting, as an exercise, is to dream up someone else’s budget. Since it’s totally abstract, you start to see what’s important to you — particularly in circumstances when you don’t have to make hard choices, and circumstances when you do.
So, for instance, let’s say you are a family bringing in $1 million/year — close to the mean for the 1% (though the price of entry is closer to $380,000; high incomes drive up the mean). You have not been crafty enough to get Mitt Romney’s 15% tax rate because you’re actually earning your money at a job. So we take 40% off the top for federal, state, local and Medicare taxes (you’re only on the hook for about $4000 in Social Security taxes though!) What would you do with the $600,000? You could spend 33% or $200,000 on housing, but would you? That’s about $17,000 a month — which gives us a home value of around $3 million with a 30-year mortgage and 20% down. But, of course, you could also get a much less expensive home and dispense with mortgage payments pretty quickly…so you didn’t have to keep working to earn that $1 million. How much of that $600,000 would you save? How much would you give away? If you wanted to give away 10% of your after-tax income, or $60,000, what organizations would you give it to? Which categories are you currently spending less on than you would like? Assuming someone actually has to earn that $1 million — so you can’t just take the whole year and travel — what kinds of vacations would you take? What would you do for fun? If you are not currently in the 1%, and you’re pondering this situation, is there anything you’re not doing now that you’d start?
After pondering the expansive budget, let’s go the other direction. Take your current budget and halve it. But let’s also erase your current obligations. You are starting fresh. In this situation, how much would you spend on housing, and what percentage of your income is that? Would that be doable (i.e. could you actually have a place to live for that amount) or not? Would you still save and give money away, or would those categories go? What would your weekly grocery amount be, and could you actually eat for that amount? What would you give up? Could you do the things you do now for fun — finding a cheaper way to do them? Or not?
I find these fascinating questions, because they reveal priorities. I save no matter what my household income. My comfort point of how much of household income I’m willing to devote to fixed expenses is relatively low. On the other hand, I’ve not been as disciplined about charitable giving. If you see there are categories you’d like to spend more on, over time, those can become financial goals. Or perhaps it is possible to re-deploy current income toward those priorities.
What would you change if you had someone else’s budget?
All the Money/other writing news:
- Time’s Moneyland blog mentions my USA Today column on why the third kid is a bargain
- Cafe Mom’s The Stir blog also mentions the column, and takes issue with the math
- This past weekend, I reviewed Charles Sykes’ A Nation of Moochers in the Wall Street Journal
(photo courtesy flickr user loop_oh)
2 thoughts on “Someone else’s budget”
What a fun thought experiment!
I have a list of questions I ask myself when I’m considering or starting a project. Two of them are (and I think I probably stole these from A Kick in the Seat of the Pants by Roger Von Oech):
What would I do if I had all the money in the world?
What would I do if had no money at all?
The answers are often revealing. Sometimes I find myself setting off on a project as if I had no money to devote to it, when, in fact, I do. (Losing weight was one of those–I couldn’t spend three months at a spa, but I could go get a massage). At other times, a simple answer comes out of that “no money” question — that gets the whole project done faster, easier, and cheaper. Or helps me choose not to do the project at all.
@Joy – Good questions! Planning some other person’s idealized budget I’ve realized that I’d like to eat out more, travel more, and go to more music concerts. All of which are totally financially feasible. I just need the kick in the pants to do it.