How to Set a 60/40 Budget
One of the problems with budgeting is that if you get too detailed while still trying to conceptualize your financial obligations, you will probably throw up your hands almost immediately and think it is too difficult.
And while I’m a big fan of the 50/20/30 budget , it can seem limiting to those just starting to create and maintain a monthly budget.
That’s when a budgeting method that focuses on just two buckets comes in handy. The 60/40 budget was popularized by Richard Jenkins, former editor-in-chief of MSN Money, who called it a “60% solution.”
The solution is that you devote 60% of your budget to basic and fixed costs . (Jenkins advises doing this based on your gross income, whereas I recommend budgeting with after-tax dollars if you’re just starting out.)
The remaining 40% goes to everything else.
Jenkins complicates things a bit by breaking that 40% down into 10%: retirement savings, long-term savings, short-term savings, and fun money. It makes sense to have subcategories so that you don’t spend 39% of your “rest” money on Jolly Ranchers or something equally frivolous, and only invest 1% in savings.
But consider these subcategories as a budgeting class at 201. We’re here at 101 trying to get the basics.
Let’s see a 60/40 budget in action with a hypothetical person I created last week .
This hypothetical person makes $ 50,000 a year before federal taxes and pays no state income tax. They do not make any pre-tax deductions in 401 (k) or any other account. Their health insurance premiums are covered by their employer.
Looks pretty good at first glance, right? This person pays off his debt every month, saves money every month, and usually runs a business. Except they are over budget and the percentage segments are 101% instead of the magic 100%.
It’s time to play. If you recall from the last budget example, our HP (hypothetical person) decided to cut his spending a bit to round up his spending on the essentials group. While they were doing this, they decided to shift debt repayment from the essentials to everything else, since paying off the debt would allow them to ultimately focus on their savings goals.
We are currently under budget, but the categories are still a little one-sided – and they add up to only 96%. By trying to cut costs first, we get extra money.
Here you can understand that budgeting frees up your finances, rather than holding them back. You can save $ 141 each month, and that person is already saving a lot. Let’s give them some extra money in their grocery budget and some money for dining out and entertainment.
And you know if we can add pet grooming to the core? I’m willing to cut my own expenses when I’m stranded, but I’m not going to give up feeding my cat, you know?
Luckily, this is our budget and we can do whatever we want. So, while we’re on our hypothetical budget employee with some extra cash, let’s make sure cat food is on our daily essentials list.
Check out this great budget! The percentages are almost perfect, and we were able to save a little while saving money for entertainment and taking care to cover what we needed.
Let’s do one more check to move on. Jenkins says that “fun stuff” should be no more than 10% of your 40% volume. Our $ 181 budget for lunch, gym and membership is just over 14% of that 40%.
But consider the whole situation here. The bills are paid, the savings are solid, and it is obvious that this person is not leading an extravagant life. The numbers seem pretty good to me.
What do you think? Do you like this budgeting method more than the 50/20/30 method?