Even after refinancing our mortgage at a lower rate, we were still often running out of cash before the end of the month. I realized that other fixed expenses had crept upward over the years. As my children, Natalie and Jackson, got older, they needed things like music lessons and sports equipment that added several hundred dollars a month to our basic expenses. They were also outgrowing clothes faster than we could buy them.

The slow but steady growth in our monthly spending commitments was putting a squeeze on our budget. I call these "committed" expenses rather than "fixed" or "nondiscretionary" expenses, because things like music lessons are neither fixed in amount nor absolute necessities, but rather are commitments my wife and I made to provide for our children.

The 60% Solution emerges

After analyzing our spending patterns over a couple of years, I determined that we needed to keep our committed expenses at or below 60% of our gross income to come out ahead at the end of the month.

Committed expenses:

  • Basic food and clothing needs.
  • Essential household expenses.
  • Insurance premiums.
  • Charitable contributions.
  • All of our bills -- even such nonessentials as our satellite TV service.
  • All of our taxes.

I'm not saying that 60% is a magic number. It's been a workable goal for my family, and it's a nice round number. Your number might well be a bit higher or lower. At any rate, it's a good place to start.

Then I divided up the remaining 40% into four chunks of 10% each, listed here in order of priority:

Retirement savings. This consisted entirely of my payroll-deducted 401k contribution.

Long-term savings. Before I retired, this was also automatically deducted from my pay. I purchased Microsoft stock at a discount as part of an unusual stock-purchase program. The relative lack of liquidity (that is, the difficulty of turning these shares into cash) made it harder to spend this money without some planning and a series of deliberate steps.

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Short-term savings for irregular expenses. These were direct-deposited from my paycheck into a credit union savings account. Money in this account was easily transferred into our checking account, as needed, via the Web. This was the money I relied on to pay for vacations, repairs, new appliances, holiday gifts and other irregular but more-or-less predictable expenses.

Fun money. We could spend this on anything we liked during the month, so long as the total didn't exceed 10% of my income.

You may have noticed that only 70% of my paycheck was used for everyday expenses. Because we never saw the remaining 30%, my wife and I didn't miss it.

We didn't really need to track our expenses, because our checking account balance was generally equal to the amount of money we could spend. That's the way a lot of people do it, but they don't first make provision for savings.