Could this be the perfect budgeting strategy for you?
There are so many great types of budgets out there! The variety of budgeting strategies reflects how uniquely we all manage our finances. After all, no single budget fits everyone perfectly. That’s why it’s really important to explore the different options available to find the one that best suits your needs.
The 60% solution, inspired by Richard Jenkins, the former editor-in-chief of MSN Money, emerged from his experience of trying to make traditional budgets work for him and his family. Instead of sticking to the rigid Zero-Sum budget, he began tracking his monthly expenses in a more streamlined way. He focused on essential categories like food and gas to stay within his income limits without feeling overwhelmed. However, the process felt tedious and was often left incomplete. Recognizing this challenge, Richard knew he needed a budgeting strategy that was simpler and quicker to adopt. This is how the 60% budget solution was born.
What is the 60% solution budgeting?
This easy-to-follow budget helps you allocate your money into five important categories:
1. Committed expenses
Start by dedicating 60% of your income to what Jenkins calls “committed expenses.” These are your essential financial responsibilities, like the four walls of finance (food, utilities, shelter, and transportation) and various bills you’ve already committed to paying. This includes things like your cable bill, subscriptions, and even your gym membership.
You might be surprised to know that your taxes are included, too! Many people overlook this when they start budgeting, but it’s essential to consider your taxes as part of your fixed expenses. Jakings mentions that 60 isn’t a magic number. It’s just a percentage that worked well for his family’s unique situation. Feel free to adjust this percentage based on your circumstances, whether that means going a bit higher or lower.
2. Retirement savings
The remaining 40% of your income, or whatever you have left after taking care of your essential expenses, is shared equally among several vital categories. First, there’s retirement savings, typically set aside in a pension plan to help secure your future. This contribution is a fantastic way to build a healthy nest egg, taking full advantage of compound interest over time. By saving early and consistently, you can greatly improve the quality of your retirement, making sure you can enjoy a comfortable and fulfilling lifestyle in your golden years.
3. Long-term savings
Then, we have long-term savings, which is perfect for those bigger expenses like buying a car. This dedicated budget is designed to keep financial stress at bay, so you can comfortably make those big purchases without relying on debt. It brings you a sense of financial security and peace of mind for whatever the future may hold.
4. Short-term savings
Next, we have short-term savings, perfect for those occasional but predictable expenses like vacations. This strategy lets you fully enjoy your planned experiences without the worry of financial stress, leading to guilt-free spending. Plus, it encourages better budgeting habits and makes reaching your personal goals easier while keeping your finances stable.
5. Fun money
Lastly, setting aside 10% of your savings for “fun money” is a fantastic way to balance your budget. It opens up opportunities for spontaneous treats and delightful activities, boosting your overall happiness and well-being. This little bit of flexibility makes budgeting feel more manageable, helping you to avoid that sense of deprivation while still indulging in the joys of life.
Jenkins thoughtfully structured the budget, understanding its main goal is to help avoid overspending. He felt that no matter what you overspend on, it can ultimately lead to debt, which is something to keep in mind. He also realized that it wasn’t just the tiny splurges here and there that caused issues. Instead, it was those more significant, unexpected expenses, like vacations or car repairs, that could add up and create problems.
How to make a 60% solution budget
Before diving into your budget, take a moment to log in to your bank account or pull out those bank statements. Having this information at your fingertips will help you figure out how much you typically earn or spend on different things.
1. Calculate Your Monthly Income
Begin by determining your overall monthly income, which includes all sources like salary, bonuses, and side jobs. For example, if your total monthly income amounts to $5,000.
2. Determine the 60% Goal
To establish your target budget for necessary expenses, multiply your total income by 60%. For example: $5,000 x 0.60 = $3,000.
This suggests that it’s a good idea to set aside $3,000 for your essential needs expenses.
3. Identify Your Essential Expenses
Take a moment to list the expenses that are really important and that you can’t do without. These usually cover things like your home, utilities, groceries, transportation, insurance, and at least the minimum payments on your debt. For example:
- Rent/Mortgage: $1,500
- Utilities (electricity, water, internet): $300
- Groceries: $400
- Transportation (gas, public transport): $200
- Insurance (health, auto): $300
- Minimum Debt Payments: $300
Total essential expenses: $3,000.
4. Evaluate Your Spending
If your essential expenses are a bit over the 60% target, take a moment to explore where you might gently cut back. For instance, meal planning could be a fun way to save on grocery costs, and using public transportation might help you save a little on gas, too.
5. Maximize your income efficiently
After managing your essential expenses, think about setting aside 40% of your remaining funds for savings, enjoyable experiences, and any financial goals you aspire to reach.
- 10% to retirement: $500
- 10% to Long-Term Savings/Debt (automobile purchases, house improvements, or debt repayment): $500
- 10% for Irregular Expenses (non-recurring expenses such as a vehicle, home, and other machinery repairs, vacations, and unforeseen expenses): $500
- 10% bonus for having a good time (without a little bit of fun, no budget is sustainable): $50
6. Review and Revise
Routinely assess your budget and modify it as needed according to variations in income or expenses. This practice enables you to remain focused and reach your financial goals.
When you embrace Jenkins’ 60% solution budget, you’ll find it easier to build a balanced financial plan that prioritizes your essential needs while still leaving room for savings and future goals enjoyment.
Is the 60% solution fit for you?
The 60% solution budget is a fantastic financial strategy for individuals with a steady income who are free from debt and excel at managing their spending habits. If you fit this description, this framework can enhance your financial well-being, supporting your immediate needs and future goals.
The main benefit of the 60% solution budget for organized individuals lies in its simplicity. Categorizing expenses and adhering to a percentage-based distribution provides a transparent view of monthly spending. For those who do not tend to make impulse purchases, this organized method aids in prioritizing necessary expenses while still accommodating leisure and savings, all without the danger of overspending.
This budgeting method may not work well for those with debt. Individuals with loans or credit card balances should focus on debt repayment before directing funds towards discretionary spending or saving. Adopting a more intensive debt repayment strategy, like the debt snowball or avalanche methods, can be critical in these situations. Failing to tackle debt can cause the 60% solution to exacerbate financial difficulties, as accumulating interest can hinder saving efforts effectively. If you’re looking for guidance on managing your debt, we suggest checking out ‘The Total Money Makeover Updated and Expanded: A Proven Plan for Financial Peace’ by Dave Ramsey. It offers some great financial advice to help you on your journey.
Moreover, the portion of income designated for retirement savings can significantly differ depending on age and personal financial situations. For younger individuals in their 20s and 30s, setting aside 10% of their income might be sufficient to accumulate a significant retirement fund over the years, thanks to compound interest. In contrast, those in their 50s who haven’t saved enough may find that 10% is inadequate for a comfortable retirement. At this point, it’s essential to re-evaluate savings objectives and consider increasing contributions to retirement accounts, as the timeframe for substantial growth is limited. People in their 50s may want to target a higher savings percentage, ideally between 15% and 20%. This recommendation considers the limited time left until retirement and the necessity to enhance savings to meet financial goals for security.
The 60% solution budget can be beneficial for individuals with stable incomes and no debt, but it may not be suitable for everyone. Those who carry debt should focus on paying it off first, and individuals approaching retirement should carefully consider their savings rates to secure a comfortable future. Customizing budgeting methods to fit personal situations is crucial for attaining financial stability and achieving long-term objectives.
If you’re interested in exploring a different approach to budgeting, try The “No” Budget Method.
