Manually tracking and categorizing your expenses – It’s something that nearly every financial guru recommends. However, in practice, it proves to be more cumbersome than it’s worth.
That’s the same conclusion that Richard Jenkins, author and former editor-in-chief of MSN Money, came to. After two decades of laboriously attempting to organize his finances, he began to wonder: Could there be an easier way?
Eventually, the answer dawned on him. It doesn’t really matter what you were overspending on. All that really makes a difference is not overspending at all.
From that theme, he proposed something called the 60% solution. Here’s how it works and why you may want to adopt a similar approach.
How Does the 60% Solution Budget Work?
The premise behind the 60% solution is simplicity. Instead of tediously tracking and categorizing your expenses, you partition your budget into a 60/40 split as follows.
The First 60 Percent
In the first column, 60% of your gross income (before taxes) will go towards what Jenkins refers to as your “committed expenses”. These might be:
- Mandatory deductions from your paycheck such as your income taxes and FICA (Social Security and Medicare)
- Insurance premiums for health, auto, home, etc.
- Fixed household expenses such as your mortgage, property taxes, utilities (water and sewer), Internet, auto payment, etc.
- Variable costs such as food, gas, energy, etc.
- Nonessential items such as gym memberships, streaming subscriptions, etc.
Effectively, these are your normal transactions. Whether each one was voluntary or involuntary, you’re regularly paying these expenses.
The Second 40 Percent
In the second column, 40% of your gross income will be further broken down as follows:
- 10% to retirement savings – Contribute to tax-advantaged accounts such as your 401(k), Roth IRA, etc. You won’t be able to touch these funds until age 59-½, but it will have the highest chances for growth and tax efficiency.
- 10% to long-term savings – Fund a taxable investment account containing stocks, ETFs (exchange-traded funds), mutual funds, etc. This will also optimize your money’s growth while still enabling it to be somewhat liquid. However, it won’t be as tax-efficient as your retirement accounts.
- 10% to short-term savings – Put your money into a high-yield savings account. This gives you immediate access to funds in the case of an emergency but still allows it to experience some relative growth.
- 10% to fun money – Do whatever you want with this money: Go to an event, buy your favorite coffee, shop, take a vacation, etc.
The idea here is that even though these aren’t “required” payments, they are definitely important. Therefore, use the latter portion of the 60/40 budget to address them and ensure that they get the attention they deserve.
Example of the 60% Solution
To demonstrate the 60% solution in action, let’s assume you earn the U.S. median household income of $74,580 before taxes.
In this case,
- 60% or $44,748 per year ($3,729 per month) should be put towards your normal, committed expenses.
- 10% or $7,458 per year ($622 per month) should go into your retirement accounts.
- 10% or $7,458 per year ($622 per month) should be invested through your long-term brokerage account.
- 10% or $7,458 per year ($622 per month) should go into your short-term savings account.
- 10% or $7,458 per year ($622 per month) should be spent doing something fun.
What Are the Advantages of the 60% Solution Budget?
The main benefit of the 60% solution is the ease with which it can be used. Unlike other budgeting plans where every dollar must be tracked and accounted for, this is not the case with the 60% solution.
Instead, the bulk of your day-to-day expenses get lumped together and managed from one large pool. As long as the total does not exceed the 60% threshold, then you’re doing okay.
At first glance, you may wonder how the 60% solution differs from other income-dividing budgeting plans such as the 50/30/20 budget. However, the 60% solution is much easier to execute.
While the 50/30/20 budget can be helpful, it involves far more calculations. Plus users need to think about how they are categorizing their expenses. For instance, credit card debt can go in both the 50% column towards the minimum payment as well as the 20% column towards paying off the remaining balance.
Additionally, the 60% solution is more slanted towards savings than other budgets. Whereas some popular plans may only have you saving 10 or 20% of your income towards goals like retirement and building your emergency fund, the 60% asks you to devote at least 30 percent of your income to these priorities.
What Are the Disadvantages of the 60% Solution Budget?
While the 60% solution has a relatively simpler structure than other popular budgeting methods, its main drawback is that it does require some initial calculation. Before using the 60% solution, participants will need to figure out what their monthly income is and multiply it across the various divisions.
Some users may find it difficult to fit all of their everyday expenses into the 60% group. Whereas other budgets leave more room for expenses, the 60% solution focuses more of your allocation on savings goals. This may result in the budgeting feeling more restrictive and force users to make additional sacrifices.
Finally, even though the 60% is intended to be less labor intensive than other budgets, this may also be its downfall. Those people who wish to improve their finances will need to get into the nitty-gritty of their transactions. However, unless you’ve already got a mechanism in place for keeping track of your transactions, then you won’t have the details you need to fine-tune your spending.
Is the 60% Solution Right for You?
There’s a lot to like about the 60% solution. Users who’ve grown tired of trying to be too meticulous about budgeting will love its simplicity.
At its core, the 60% solution is just a simple rule designed to keep you from overspending. At the same time, it forces you to give some much-needed attention to other often overlooked priorities such as investing for the future, building an emergency fund, and just plain having fun.
However, the 60% solution is just a framework. Those who need to really pinpoint where they should make cuts will need a more detailed approach. Additionally, super-savers who prefer to devote more than 10% to their retirement accounts will opt for a more aggressive approach. Ultimately, use what parts of this process you feel will be most beneficial and tweak them as necessary.
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