But just as people have different spending personalities, there are different budgeting personalities, too. And that means many popular budgeting styles aren’t for everyone.
If you have irregular income or fixed expenses, a zero-based budget can be complicated.
If you’re not good at tracking all your expenses, the 50/20/30 budget might be too restrictive.
But there’s also a simple method in the middle that can be great for a beginning budgeter, and it’s the simplest to alter if none of the above work for you: the 60% solution.
How the 60% Solution for Budgeting Works
Coined by Richard Jenkins, author and former editor-in-chief of MSN Money, the 60% solution splits your budget into two sections and doesn’t require any expense tracking.
Jenkins developed it after he reviewed two decades of his spending. He found that the times he felt most financially secure were not when he was earning a certain amount, but when he was spending under a certain percentage of his income.
When his “committed” expenses — that is, necessities, plus nonessentials you’ve committed to — were within 60% of his income, he felt more in control of his money.
Jenkins includes his kids’ music lessons and sports dues in his committed expenses, but you might include a gym membership or professional group. Other commitments include:
- Basic food and clothing.
- Essential household expenses.
- Insurance premiums.
- Bills, both essential and discretionary.
- Taxes, such as property, capital gains or income tax if you’re self-employed.
If your committed expenses exceed 60% of your income, you might need to start looking for places to cut back.
Jenkins stresses that 60% isn’t the magic number, but it’s a round number that’s easy to remember, and it works for him. You can adjust the percentage to work for you and your financial goals.
What About the Other 40%?
Jenkins divides the last 40% into 10% increments. He keeps his savings in the best places for him, but I’ve included my recommendations on where most people will want to keep their money:
- 10% to retirement savings in your 401(k) or IRA.
- 10% to long-term savings in a taxable investment account, meaning you can access the money within three days but will only withdraw from the account once every few years. This allows interest to compound and make you more money. It includes your emergency fund for things like medical bills and savings for planned purchases like cars.
- 10% to short-term savings in a high-yield savings account that you can instantly access or use to transfer money to your checking account via the web. This is for more frequent, unplanned needs like repairs, as well as vacations and holiday gifts.
- 10% to fun money that you can spend on anything as long as it doesn’t exceed 10% of your income.
If you put 30% of your income toward savings, you’re way ahead of the average American — who saves less than 5% — but it’s well worth it when you’re trying to build your financial foundation.
If you’re making $40,000 per year, then your take-home pay, depending on your filing status and allowances, is roughly $2,800 per month.
That equates to $1,680 for committed expenses and $280 toward each saving and fun category.
Here’s what $280 per month can get you:
- $265,000 in your Roth IRA after 30 years at 6% interest. That’s over $164,000 in growth!
- A paid-for $15,000 car in just over four years.
- A $2,000 vacation every year with $1,300 left over for unplanned expenses.
- A $280 sushi budget. Every. Single. Month. (Priorities.)
Sounds like it’s worth cutting back some of those committed expenses, right?
If that’s too hard right now, you can easily alter the 60/40 ratio to meet you where you are. Increasing your savings categories, lowering unnecessary expenses or cutting your fun money are all moves in the right direction.
Regardless of how you define your percentages, there’s one thing that makes or breaks a budget: your ability to say “no.”
So whatever your budget, remember you’re in control of whether you spend within it.
Jen Smith is a staff writer at The Penny Hoarder. She gives money-saving and debt payoff tips on Instagram at @savingwithspunk.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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