Updated: 10/27/2011 1:53 PM ET|
Simpler saving: The 60% Solution
Years of complex budget calculations have led me to a simple conclusion: If you limit essential spending to 60% of total income, your savings will soar.
How many of you have tried budgeting and think it's a waste of time? Come on, let's see those hands.
OK, that's just about everybody.
I've kept a budget of one kind or another, first on paper and then with the help of various software programs, for many years -- despite a strong suspicion that I was wasting my time. The illusion of control, I argued to myself, was better than none at all.
My approach to budgeting was to carefully track my spending during the month and to adjust my budget targets up and down in each category, so that my total expenses never exceeded my income.
Useful? Sometimes. Anal-retentive? Probably.
After two decades of this, though, I started to wonder if there isn't an easier, more effective way to budget. I realized that the hardest part about keeping a budget is getting useful information from it. There's too much detail and not enough bottom line. My answer is the 60% Solution, a faster and easier way to structure your budget without having to account for every penny.
What you're trying to do with a budget is to prevent overspending, which ultimately leads to piling up debt. Contrary to the way most people budget, however, it rarely matters what you're overspending on -- dining out, entertainment, clothes. Who cares? It's still debt, right?
Looking at my own spending history, I realized that it wasn't the little luxuries here and there that got me in trouble. It was the large, irregular expenses -- like vacations, major repairs and the holidays -- that did all the damage. To avoid overspending, I had to do a better job of planning for those.
And then there were the really big expenses: buying a car, putting a down payment on a new home or putting a new roof on an old home, all of which can run into the tens of thousands of dollars. They also can often be postponed, sometimes for years, which theoretically should give me a chance to save for them.
Understand your committed expenses
As I looked back over the past 20 years of budgeting, I saw that there were a few years when my wife and I believed we were fairly on top of things, even with a much lower income. How did we manage?
The key was a drop in our fixed monthly expenses. It was a period when declining interest rates had lowered our adjustable-rate-mortgage payment to about 15% of our household income. That left us with some extra money each month to set aside in a savings account for those irregular expenses.
We later moved to a bigger house with a much bigger mortgage payment, higher maintenance costs and utility bills, and obscene property taxes. The monthly mortgage payment was only 20% of our gross income, far lower than the 33% that most lenders will allow, but, suddenly, we were struggling again.
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Some of these are very good advices. From my perspective I would add something extra. Few years ago I found great way to productively utilize my free time. I am a stay home mom and my kids can safely play by themselves now (under supervision of course) while I enjoy my favorite TV shows ...with one little difference. Now, while I watch I also take online surveys. One thing to another and I managed to make $4000 last year. I know it’s not for everyone, but so are above suggestions. I like taking surveys and getting paid. In the beginning it was very slow since I wasn't signed up for the right survey sites (that pay cash), If you think this could be something for you look up free info sites like surveyjet or zeeses (they both show proof of payments which is great, so you won’t be taking any sweepstake surveys that don't pay ...unless you win)
You say you calculated 60% of the GROSS income.
Then you took the rest and divided it into 4 parts of 10% each.
What about the taxes that you pay on your income?
Let's say you earned $1,000/ week. 60% is $600. Aren't you paying about $300. in taxes? In your calculation, you still have $400 to divide between the 4 categories. What am I missing?
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