Budgeting Strategies… What Are You REALLY Worth?

Senator and presidential candidate Elizabeth Warren made the 50/20/30 budget plan popular in her book “All Your Worth”.[i]  In her book Warren outlines that you should spend 50% of your income to pay for things you absolutely need.  This includes:

  • Housing costs
  • Transportation costs
  • Groceries, Clothing, and Utilities
  • Insurance premiums
  • Minimum debt payments on credit cards and unsecured debts

Warren further advocates that 20% of your paycheck, should be earmarked for savings.  Her idea of saving includes:  (Note: Only one of these items is actually defined as savings. The others are all investments.)

  • 410k or 403b contributions
  • IRA contributions
  • Mutual Fund Investments
  • Emergency funds in your bank account
  • The purchase of stocks and bonds, as well as
  • Paying more than your minimum required payments on your debt

With this kind of allocation, Warren teaches that you can spend 30% of your paycheck on anything else that you would like to spend it, like:

  • Entertainment
  • Eating out
  • Netflix
  • Coffee houses, or
  • Vacations

The problem with Warren’s system is, that it is out of balance, but that shouldn’t surprise you.  Of course you know that politicians can’t balance the United States budget.  Why anybody would then trust Senator Warren to help you balance yours is laughable.

Here are some data that you need to understand in order to find out what you are really worth!

According to the US Bureau of Labor Statistics,[ii] America is currently obligated to spend over 60% of their paycheck each month on:

  • Housing, including utilities, 27%
  • Food 10%
  • Transportation 5.51%
  • Clothing 2.49%
  • Healthcare 6.7%
  • Insurance 8.63%

That comes to 60.33% without even paying your minimum required payments on your credit cards and un-secured debts. And that means you are already more than 10% over budget if you use Warrens 50/20/30 plan for your finances.

A Budget System That Works

The good news is, that long before Senator Warren claimed to be a native American and stole her way into Harvard, a more traditional and viable system of managing your paycheck was known and that is the 10/20/70 Rule.

With the 10/20/70 Rule, you allocate 70% of your income to pay for your:

  • Charitable giving and/or tithe
  • Housing costs
  • Property Taxes
  • Student loan costs
  • Transportations costs
  • Groceries, Clothing and Utilities
  • Insurance premiums
  • Entertainment costs, and if it is affordable
  • Paying more than the minimum required payments on your debt

This allows you to use 20% of your paycheck to pay the minimum required payments on your credit card and any unsecured debt, leaving you with 10%…maybe more (depending on how much you have to spend of the minimal debt payments), to keep for yourself.

As time progresses the money you keep will benefit from compounding interest.  And this will allow you to self-finance the 20% of your budget and redirect that interest paid to others back to yourself. As the average person is losing, $4,192 per person per year in America today, just on credit card interest [iii], using the 10/20/70 Rule puts more money back in your pocket than Warrens 50/20/30 plan possibly can.

But politicians, including Elizabeth Warren, really don’t want you to have more money in your pocket.  Too much money in your pocket could make you stop feeling the need to keep sending them to Washington DC.

However, if you seriously stop thinking that this is “All You Are Worth”, and start discovering how much you are REALLY worth, things can change drastically for you and your future. It is truly that simple.

  • Money that you don’t lose to others in interest can keep growing for you, even while you leverage it. And if you leverage your money to self-finance the things for which you would normally pay interest to others, you will keep more of what you make.

If you redirect what you are losing in interest ($4,192 per person per year), and earn a moderate annual rate of return of 6% you will have $154,205 in 20 years.

Nevertheless, even then, as with any investment, you will have to pay taxes and trading fees which becomes bothersome because it ends up costing you again!  As taxes will take approximately 2% or more of your money, and fees another 1% to 2%, you will end up with closer to $112,640 instead of $154,205.  And that is, if taxes don’t go up between now and 20 years from now.

Another more viable way to not lose that kind of money to the tax man and investment fees is to utilize Participating Whole Life Insurance. At age 45 an average American male in good health can redirect that $4,192 every year into a Participating Whole Life Insurance policy and end up with $114,000 of guaranteed cash value along with a death benefit for over $250,000.

In doing so, he will completely avoid his losses due to the taxes and fees mentioned above.  And he will also accomplish something that all wealthy individuals know and understand, and that is the power of leveraging your own funds to earn even higher profits.  This, along with the added protection and legacy that life insurance provides his heirs and loved ones, is a much more valuable system.

But this kind of reasoning doesn’t sit well with government or fund managers.  Allowing you to keep more of what you make would make you and your heirs less dependent on them.  And so, is it any surprise that Elizabeth Warren advocates the 50/20/30 plan instead of the 10/20/70 Rule?

[i] https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp

[ii] https://www.bls.gov/news.release/cesan.nr0.htm

[iii] https://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276.php