According to Manisha Thakor and Sharon Kedar, authors of “On My Own Two Feet,” you really only need three basic expenses in your budget: foundation expenses, fun expenses, and future expenses.
They call this the “power trio.”
Before we break down the expenses included in each category, note that Thakor and Kedar are unusual in that they count the percentage of your earnings — your gross income — allocated to taxes as part of your overall budget.
In their model, income taxes account for about 25% of their income, which leaves 75% for budgeting and spending.
The genius of the power trio is that it leaves a lot of wiggle room by providing broad outlines rather than prescriptive numbers. Every expenditure isn’t detailed to the cent, so if you need to divert some cash from, say, your groceries budget to your utility bill in the winter, you’re able to do it and stay within budget.
Here are the three types of expenses that Thakor and Kedar say are the best uses of that 75%.
1. Foundation expenses
Thakor and Kedar define foundation expenses as “items of basic need such as grocery, shelter, and transportation.”
They recommend allotting just under half of your spending — 45% — to this expense. However, if you think you can get by on less, that just means you’ll have more money left over for fun expenses.
2. Fun expenses
According to the authors, anything you want but don’t need qualifies as a fun expense. This could be drinks out with friends, a new phone, or a weekend trip. Thakor and Kedar say these expenses should account for 15% of your budget.
3. Future expenses
Thakor and Kedar refer to any money you save as future expenses, which is a much more compelling point of view than “savings.” A few examples of what they recommend saving for are an emergency fund, retirement, and big ticket items like a car or home. Just like fun expenses, future expenses should make up 15% of your budget.
Thakor and Kedar point out that people who have an above average income or who live somewhere with above average state or local taxes might be putting more than 25% of their gross income towards income taxes.
If this is the case for you, the authors suggest keeping your future expenses to 15% of your budget, and adjusting your foundation and fun expenses to account for less than 60% of your budget.
Here’s what the trio looks like, as presented in their book: