Many people complain that budgeting is too confusing and that they have a hard time setting concrete goals for themselves, and when they do set goals, they’re so loose that they are easy to meet but they don’t really generate any significant savings.
One major solution to this problem is the so-called 60% Solution, described in detail in this article at MoneyCentral. In a nutshell, the 60% Solution is a pledge to reduce your active spending to 60% of your take home pay, leaving the other 40% for elimination of debt and, later, investments.
Imagine it this way: as soon as you get your paycheck, you immediately take 40% of it and put it in another fund, your “investment / debt elimination” fund. The rest is what you have to spend for the month for committed and extra expenses – and you aren’t allowed to rack up any extra credit card debt, either.
It’s one challenging goal, especially for most Americans, but it is a great way to corral your money. However, the challenge of it is the point – it forces you to really look at all of your spending and evaluate whether or not it is appropriate or not.
What’s the benefit? It’s not too difficult to see what would happen if you had 40% of your income to invest each pay period. Let’s say you bring home $30,000 a year. Under this plan, you would be able to invest $12,000 of it annually. If you put it into an investment plan that returned 10% each year (and kept putting that income back into the investment each year), do you know how long it would be before that fund was producing your living expenses ($18,000)? 11 years. How long before the investment income replaces the whole salary? 15 years. If you started doing this at age 25, you would literally be able to walk off the job at age 40, live off the capital gains of your investment, and still build your investment at a healthy rate.
Try this exercise. Just attempt to make a simple budget for the month, with 40% right off the top going straight into savings and investments. It’s really hard to do for most people, so don’t feel bad if you don’t come anywhere close. Now, try to imagine ways where you could hit that target number. Could you live somewhere cheaper? When your car is paid off, could you just drive it for several years without trading it in? Could you do without the morning coffee, or maybe trim the fat off of your energy, cable, and telephone bills? Ask yourself: are these things worth it so that I don’t have to work ever again in just a decade and a half? Also, ask yourself: why am I not doing these things right now?