The 60% Solution for the Budget Phobic
Richard Jenkins, the Editor in Chief for MSN Money, wrote an article about budgeting called A Simpler Way to Save: The 60% Solution. It looks both fascinating and easy.
One of the difficult parts of budgeting is knowing how much to budget to each expense. Well, the great thing about The 60% Solution is that instead of having so many little numbers to keep track of, you’re looking at a general percentage and larger budget categories, five to be precise.
Here’s a starting point of where your money will go with The 60% Solution (all percentages of your gross income):
60% - committed expenses (food, clothing, mortgage, car payment, taxes, heath insurance, all other bills)
10% - retirement savings (401k, IRA)
10% - long term savings and/or debt reduction (also doubles as emergency fund)
10% - short-term savings (irregular expenses)
10% - fun money (vacations, big purchases)
Richard stresses that making this work will depend on you keeping down your committed expenses, which is a goal of most every one trying to balance their budget in the first place, I would think.
What if you can’t get your committed expense below 60%? Use your long-term savings and retirement savings towards knocking down your debt until you reach the 60% goal.
Another problem is one I see frequently, where people are simply overextended based on their current income.
Even excluding debt payments, reducing your committed expenses to 60% still seems like an impossible goal. If that describes your situation, the odds are good that you’re facing one of the following problems:
- You have a more expensive home than you can afford.
- You’ve committed to car or boat payments that are larger than you can afford.
- Your children are in a private school that you can’t really afford.
- There’s just a big, ugly gap between your income and your lifestyle.
These are all fixable, although you have to be willing to take the necessary actions to fix them. If your house is more than you can afford, you should consider downsizing, for example.
Now, I really like these general guidelines. They work for me. As a matter of fact, looking at my current budget, I think I am pretty darned close to falling right in line with these percentages.
For a person that might need a little stricter control, I’m not sure this will work. This is more for the person that just can’t be bothered with all of the minutia of a thoroughly Elana-esque budget. The 60% Solution guidelines are there to give you structure. It doesn’t mean that you can’t do a detailed budget that aligns with this, though. I would strongly encourage it simply because you can get more control over your committed expenses by knowing precisely what they are each month.
Here is a calculator to help you along with your planning.
For those of you with budgets, how does your breakdown look compared to this? Does it seem far off?
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June 13th, 2006 at 8:01 am
The late, great Larry Burkette recommended that no more than 50% of one’s income go towards housing, car and debt expeditures combined. More than that, he said, was a sign of loaming financial crisis.
I think the 60% rule is fine if one has a relatively high income. Assuming a $30,000 annual salary and minimal (10% total) taxes, using the formula leaves 1350 to live on. That’s simply too low for food, clothing, rent (no possible way to buy off that), car, gas, utilities, etc., etc. $30,000 is above the federal poverty line for a family of 6, so assume no public assistance for your average family of 2 or 3. Even eliminating the “fun money” catagory only adds $225 to the available budget.
Now, if one’s income is whatever it needs to be to make a take home of $50,000 a year (tax rates are not my strong suit), your 60% committed expenses amount is more like $2500 a month. Much easier to live off of.
That’s not even mentioning that there doesn’t seem to be any room for charitable giving in the formula.
June 13th, 2006 at 9:23 am
The article itself lists charitable donations under the “committed expenses” section. The author actually throws quite a few things under that category, not all required for living but things he’s committed to doing, such as music lessons for his kids.
There was a lot of discussion on the MSN Money forums about this budgeting solution because it didn’t fit well with lower-income families that had to use every penny to survive.
People live on $30k and a lot less everyday so it’s absolutely possible. Their financial situation is more fragile, though, because they don’t have the means to save a lot. Those situations require a more detailed budgeting style than this. There is a big difference in the way people have to budget their money between those living closer to their means and those with more breathing room.
June 13th, 2006 at 2:20 pm
Ironic that situations which make short term savings the most critical also make it the most difficult. :/