Are you using the golden ratio of finance?

Are you using the golden ratio of finance?

SmartAsset: Morningstar Says This Spending Strategy Helps You Achieve Your Financial Goals

There is no shortage of budgeting and spending rules when it comes to personal finance. One says that you shouldn’t spend more than 30% of your monthly income on housing. Another says that you always save 10% of your income. Don’t take more than 4% of your retirement savings. And then there’s the budget for the golden ratio. Here’s why Morningstar says you should consider this strategy.

A financial advisor can help you create a financial plan for your needs and goals.

This budgeting approach breaks down your monthly expenses by weighing how much of your gross income goes toward your past, your present, and your future.

According to Morningstar, your expenses can be broken down on this financial timeline:

  • Last: Pay for things you bought/did in the past

  • The present: Financing your current lifestyle

  • The future: Accumulate to create future income

For example, someone who makes $60,000 a year has a gross monthly income of $2,500. If she saved $250 for retirement and paid $250 a month on her credit cards, her golden ratio would be 10-80-10, with 10% for the past (debt), 10% for the future (retirement), and 80% on current housing, food and other living expenses.

By analyzing your own spending and calculating your golden ratio, you can give yourself a budget check without getting bogged down in how much to spend on groceries, how much on gas, how much on clothes, cell phones, cable TV, and other expenses. This type of line item budgeting can be confusing, intimidating, and just plain tedious. And it can discourage people from rationally analyzing their spending and making a plan that directs every dollar where they want it to go.

“A specific dollar amount is not helpful because everyone’s finances are different,” Morningstar explained. Instead, the Golden Ratio “skips all the scrutiny and enumeration and gets right to the heart of what you need to know: Is your cash management healthy? Are you saving enough?”

While there are no hard limits to the budget scheme, Morningstar recommends aiming to save 20% while keeping your debt payments at 30% or less of your gross income. A 30-50-20 budget could serve as the ultimate goal over time. But you should also keep in mind that other experts recommend “the 36% rule,” which states that your debt-to-income ratio should never exceed 36%.

The Golden Ratio budget echoes the more popular 50-30-20 budget, which recommends spending 50% of your income on needs, 30% on wants, and 20% on savings and debt. The “needs” category covers housing, food, utilities, insurance, transportation, and other necessary living costs.

Another approach, favored by behavioral economists, recommends skipping budgeting entirely because most people simply won’t stick to any kind of formal spending plan. Instead, they suggest automating your savings toward specific goals and amounts, and then feel free to spend the rest.

“If your debt is healthy and you’ve met your savings goal, then you can spend the rest guilt-free! It doesn’t matter if you spend it on restaurants, vacations, clothing, or model trains,” Morningstar said in an article. who set a 10-60-30 ratio as a personal goal. “If your past and future are in good shape, then you can skip all the details and agony and just enjoy your life and your money.”

Bottom line

SmartAsset: Morningstar Says This Spending Strategy Helps You Achieve Your Financial Goals

SmartAsset: Morningstar Says This Spending Strategy Helps You Achieve Your Financial Goals

The golden ratio budget breaks down your monthly expenses by weighing how much of your gross income goes toward your past, present, and future. This approach can help put your finances on a schedule and adjust your goals based on short-, medium-, and long-term needs.

Tips for financial planning

  • A financial advisor can help you compare different budgeting strategies for your financial plan. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • One key to budgeting is having a good understanding of your financial timeline. If you need help setting goals, this guide breaks down retirement goals by age.

Photo credit: ©iStock/fizkes©iStock/shape charge

The post Are You Using the Golden Ratio in Finance? first appeared on the SmartAsset Blog.

Leave a Comment

Your email address will not be published. Required fields are marked *