Some Thoughts On The 60% Solution

A couple years ago, an extremely influential article entitled A Simpler Way To Save: The 60% Solution popped up on MSN Money. It proposed a very simple way to budget:

After analyzing our spending patterns over the past couple of years using our Microsoft Money data file, 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 non-essentials as our satellite TV service.
* ALL of our taxes.

I’m not saying that 60% is a magic number. It’s a workable goal for my family, and it’s a nice round number. But 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: consisting entirely of my 401(k) contribution, which is subtracted automatically from my paycheck.

Long-term savings: also automatically deducted from my pay to buy Microsoft stock at a discount as part of an unusual stock-purchase program. The relative lack of liquidity (i.e. the difficulty of turning these shares into cash) makes it harder to spend this money without some planning and a series of deliberate steps. In a real emergency, though, I could sell and have the cash wired into my bank account within three days, so this is also our emergency fund.

Short-term savings for irregular expenses: which are direct-deposited from my paycheck into a credit union savings account. Money in this account can be easily transferred into our checking account, as needed, via the Web. Over the course of a year, I expect to use all of this money to pay for vacations, repairs, new appliances, holiday gifts and other irregular but more or less predictable expenses.

Fun money: which we can spend on anything we like during the month, so long as the total doesn’t exceed 10% of my income.

So, they spend 60% of their income each month on required expenses (food, house, taxes, etc.), sock 10% away into a 401(k), sock another 20% away into long term and short term savings, and spend the other 10% on fun stuff. This general framework became so popular that it has been incorporated into recent versions of Microsoft Money, making it easy for people to organize their finances using this model.

I basically feel that this is a fantastic framework for people who are trying to get their money straight but have no idea where to start. A few little caveats, though:

60% is a baseline, not a hard and fast rule. If you dive in, I suggest starting with 60% and seeing how it goes. If you actually find it easy, try some frugal things and see if you can turn it into the 50% solution (and kick that extra 10% into savings); if it’s extremely difficult, make it a 65% solution for a while.

Frugality helps. Being frugal cuts down on that 60%, making it easier for you to reach that target or, even better, enable you to beat it. Doing things like installing CFLs instead of incandescent bulbs and practicing good shopping habits simply shave money off of what you owe every single month, resulting in some serious breathing room.

The short term savings is basically an emergency fund. As I’ve mentioned before, an emergency fund is one of the best assets you can have because it can earn at a solid rate, plus protect you from going into debt when the inevitable happens. If you don’t have one and are thinking of diving into the 60% solution, I would redirect some of the long term savings into short term savings until you reach a pretty solid number for your emergency fund. Personally, I’m shooting for eighteen months’ worth of emergency fund as soon as I can manage it – a very large emergency fund is personally important to me.

Don’t beat yourself up if you try it and at first don’t succeed. This is true for any personal finance goal, because such goals are a lot like diets: people set very difficult goals right off the bat, fail to reach them, and thus use that as an excuse to fall back on bad habits.

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21 thoughts on “Some Thoughts On The 60% Solution

  1. Andrea says:

    My husband and I started to use the 60% Solution about a year ago now and at first it was VERY frustrating because we could not seem to get to 60%. Sometimes we were closer to 70 – 80%, but after about 6 months or so, we really started to see a difference, now we are consistently at or below 60%. We did our division about the same as stated in the article, 60-10-20-10, and it seems to work well for us. We are now in the process of trying to stock more away into savings and debt reduction (Mostly for student loans).

  2. Ericka says:

    This sounds like a great idea. My concern is being able to do this since my income can fluctuate 5-10% in any given month.

    Love your site! I’m working very hard to get my dollars and cents under control and out from under a pile of debt, and your posts have given me some fantastic ideas.

  3. dwlt says:

    You may have covered this elsewhere and I missed it, but may I ask why you’re aiming for an 18 month emergency fund?

    Also, I assume that’s 18 months of expenses rather than 18 months of income?

  4. Rick says:

    I’m not sure that I like keeping one’s emergency savings in Microsoft stock (or any one company stock, for that matter), but the rest sounds like a good goal to have.

    dwlt: I’m not sure where Trent said he wants an 18 month emergency fund, but I do recall him saying a good strategy is 2 months for every person in your household. Since, once the baby is born, he will have four people in his household, I’d imagine he wants an 8-month emergency fund (of expenses, not income).

  5. dwlt says:

    Thanks Rick – the 18 month fund is mentioned in the last sentence of the second last paragraph.

  6. Felis says:

    Ok, this guideline makes me feel really good. We’ve been aggressively paying down our debt, and for a while the thrill of watching the numbers was enough to sustain a frugal life… Lately though, it’s been tough. The “end” is only 5 1/2 months away but it’s starting to wear on my nerves living on such a tight budget for the last year and a half. According to this rule though, we are living on 44%!!! The rest is going to paying off the debt and savings. No wonder it hurts! We’re kicking butt! :-) Thanks for the great blog!

  7. r says:

    There’s no mention of charitable giving in this discussion at all, atlhough it’s one of the things I think of as coming up any time I breakdown my money allocation by percentages. I guess it’s just an unlisted part of the “committed expenses” part, but I wish it were listed directly…!

  8. Beth says:

    I wish these rules of thumb would work with our take-home; those numbers are much more meaningful to me. In my case, after taxes and retirement savings, my take-home is 66% of my gross.

    My committed expenses (including extra debt pay-down) are 55% of my take-home – BUT I do not put food or clothing in there. I’m just now starting to benefit from paying off my credit card, so I guess I’ll see how I can apply this rule of thumb to my situation: I’m thinking I’ll do 25% of my take home as day-to-day spending (including food & clothes), 10% long-term savings, and 10% emergency fund (then other short-term savings).

    But oh how I wish someone (*cough*Trent*cough*) would write a rule of thumb for take-home divvying.

  9. J.T. says:

    Beth, it would be difficult to come up with any meaningful guidelines for take-home pay since everyone’s circumstances are different. Just the difference between someone with a workplace retirement savings plan and someone without can be a significant amount. Add in insurance premiums, health savings accounts, employee stock purchases, etc., and the numbers become even more difficult. And that’s not even taking into consideration independent contractors, jobs where most money comes from tips, the self-employed, or any other number of unusual circumstances.

    As an added bonus, thinking of your paycheck as a gross rather than net number may make people more sensitive to where their tax and retirement dollars are going. That’s never a bad thing.

  10. BigBuddha says:

    the 60% solution is a great way to set up a quick and dirty budgeting system.

    It doesn’t take a great deal to monitor and provides for some “spend” money which is important I think once you’ve got your non-tax deductible debt undercontrol.

  11. pete says:

    hi,

    this is about your article on msn money about retiring at 40: i really like what you’re doing here, but as a social scientist and a stats prof i’d estimate there’s only about a 16% chance you can count on that 12% annualized return (based on the 20-year time horizons over the history of the S&P at sites like this one:

    http://www.moneychimp.com/articles/randomness/time_horizon.htm

    if you want more details please just drop me an e-mail at my listed e-mail — sorry to post here but i couldn’t find anywhere else — thanks and good luck!

    pete

  12. Beth says:

    J.T. – good points. I guess I’ll have to suck it up and do the math based on my gross!

  13. Minimum Wage says:

    Unrealistic for those of us earning minimum wage.

  14. gary says:

    It is impossible for someone who is in 40% tax bracket… I make a bit more than 100k and am having a HARD time keeping my monthly expense in budget…
    First of all, tax will take 40% of my gross income, then I will only have 20% left which is $1800. How can a person pay every thing (food, rent, insurance, utilities) within $1800???
    First of all, where I live, the rent is $1700 a month. I live alone and don’t have a family or parents.
    Second, food is at least $800 a month. I don’t have time to cook.
    Utilities are easily $300: HD cable, electricity, cell phone.
    Gas: It’s easily $300+ now days.
    Car insurance and car payment: $1200

    I really need some help and a more realistic budget solution.

  15. Christine says:

    Gary,
    I think you might be missing the point. The point of the 60% solution is to help you budget and be more aware of HOW you’re spending, based on your gross income.
    If this article has made you realize that even while making over 100k, you’re still over-spending, it’s done its job.
    If your complaint is that your rent is too high, you might need a place with lower rent (I live in NYC on 30k per year – so, I understand the difficulty in that). If you are spending $800/per month on eating out, maybe you need to compromise and eat in a few more nights than you are.
    The point of this budget is to help you delegate certain percentages to specific areas of your life. It will not be uniform for everyone and you can mold it to fit your lifestyle, but it may also force you to mold your lifestyle to fit your budget.

    Map it out on a spreadsheet and give it a shot. See how much you SHOULD be spending according to the 60% Solution and compare it to how much you ARE spending and see if there are ways you can get those two numbers to be closer together.

    Good luck!

  16. Kai says:

    @Gary, if you’re still lost out there-
    With a high tax bracket, maybe looking at it that way is not the best, but even after taxes, you should be able to achieve it.
    How can a person pay everything within $1800? This is an almost offensive question. I, for one, make about half that in take-home pay – and I’m not alone – or in debt.
    The fact is, you have ridiculous expenses, that you seem to believe are required.

    $1700/month rent? For a single person? What on earth are you renting?? Downgrade – either a smaller apartment (I can’t believe you’re in a 1-bedroom for $1700), or take on a roommate and halve it.
    $800/month in food? You’re simply making excuses for yourself here. No-one ‘has time to cook’. they make time. Learning to cook large meals and tupperware them for the week is great – devote Sunday evening every week to food prep, and you’ll have time to cook (read reheat, or toss on the toppings) all week.
    Cable and cell phone aren’t normally utilities, but whatever – why do you have HD cable? (not having watched tv in years, I don’t actually know what this is, or if you pay more for it than regular cable) or even cable? Surely you don’t have time to watch TV. If you have time to watch TV, it’s time to stop – save yourself the cable payments, and spend the time cooking instead – double savings!

  17. Crystal says:

    I am racking my brain on settting this 60% solution up for us (although we have to start at 70%) but am struggling with the issue with getting paid every 2 weeks. That means that we get 26 paychecks instead of just 24. If I calculate it as 24 paychecks, making it a consistent flow of income for all 12 months, the amount is about $500 higher than what really comes in every month. Of course we have 2 “extra” paychecks a year, but not right away. What is the best way to deal with this when you are trying to figure out the most accurate way to spend your money every month and consistently put money into savings?

  18. Colin says:

    To Crystal:
    I have the same issue with being paid every 2 weeks. What I do is figure out what I would be paid if it was bi-monthly (take your net take home pay, multiply by 26, then divide that amount by 24). I then have my wages direct deposited into a savings account with a linked checking account and set up automatic transfers on the 1st and 15th of each month but I set the transfer amount to the BI_MONTHLY amount you figured out earlier. The only caveat to this is that you have to have a little extra money in your savings account to start off as you will be drawing more than you are paid for the first x amount of months until the one month comes when you are paid 3 times in that month, then that extra becomes the ‘float’ and is automatically distributed over time with the regular transfers.
    Hope this idea helps.

  19. Don says:

    Regarding comment #14: How can you be in a 40% tax bracket? At 100K AGI you would be in the 28% marginal tax bracket. That should give you an effective tax rate of around 22%. Add in FICA and you are approaching 30%. I don’t know of any state that would have an 10% effective rate. I don’t even know if there are any with that high of marginal rate. You would need an that high of rate to approach 40%

  20. Mike says:

    I came across this site and wanted to mention that I don’t understand the methodology of the 60% solution.

    There are five categories:
    Committed expenses
    Retirement savings
    Long-term savings
    ST Savings
    Fun money

    Where does Debt go? I have a lot and should this be mixed in with committed expenses? Where does an Roth IRA go (after tax retirement, I assume Retirement savings but contributions are quite liquid). If so, my retirement savings is like 30% which throws a wrench in my % of ST and LT savings. Regarding post #1, what is 60-10-20-10 allocation?

    An interesting concept though.

  21. Fawn says:

    This is a great idea. I will work on that once I get my debt paid off. Right now I bring home $1,000 per month. I pay $300 in rent, $350 to debts and $54 in car insurance. That comes out to be over 70% of my income, and that doesn’t include gas, food, or any other expenses. It will be tight for a while, but worth it! ;)

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