The 60% Solution: Saying No to More Money Commitments

Richard Jenkins has an thought provoking article on MSN Money, A simpler way to save: the 60% solution. Jenkin says that after 20 years of doing regular budgets he has found that when money gets tight it is becafuse his committed expenses exceed 60% of his income. Much like how a bank determines how much house you can afford as a percentage of your income, Jenkin realized that when his regular, committed expenses exceed the 60% mark, he began to run into financial trouble. Lets look at how Jenkin defines his system.

Committed expenses include taxes, insurance, charity, regular bills, and basic living expenses such as food and clothing. I wonder how to include clothing as a regular expense. My family may go months between expenses for clothing. Under my current budget system I set aside a dollar amount each month that is held in reserve until needed, but that does not sound like what he means as a ‘committed’ expense, but more like the next category, “irregular expenses”.

Jenkin describes “irregular expenses” as a short-term savings fund that can be transferred to checking as needed. This fund is designed to pay for things like vacations, home and car repairs, furniture, and new appliances. From his description these all seem like big ticket items, but I wonder if other expenses would go in here? My AAA Motor Club renewal? Clothing? Haircuts?

The next category is “fun money” to spend as you see fit, for comic books, eating out, music, your hobbies, etc. Jenkins allocates 10% this category, but for our family that would be extremely excessive. I doubt we spend more that 5% in this category each month. Possibly this is because with 6 kids still at home there are too many regular, committed, expenses to be able to afford much more.

This leaves us with 20% of our income. Jenkin has half of the 20% in to retirement savings account such as a 401k, IRA, or whatever account you use to save for retirement. The remaining 10% is put into long-term savings (or debt reduction if you have unpaid credit card balances). This money is being set aside for future car purchases, major home fix-ups, and other investments.

So, in reality 10% is truly being saved for retirement and the rest is either being spent or being set aside to be spent. 10% towards future big ticket items, 10% towards personal spending money, 10% towards irregular expenses, and the remaining 60% goes towards regular monthly expenses. The key is watching that you don’t make too many commitments and exceed your threshold for monthly expenses.

I like the simplicity of this plan, but am afraid it may only work for those who, like the Jenkins, already have budgeted for quite awhile and already have their cash flow under control.

The real secret to building a budget that really works isn’t tracking what you spend, any more than counting calories is the secret to losing weight. The key is creating a sustainable structure for your finances, one that balances spending and income and that leaves enough room to handle the unexpected.