Updated on 04.06.07

Some Notes On The 60% Solution

Trent Hamm

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?

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  1. Bill says:

    Is that really 40% saved when he’s including 10% for fun money? :)

    It’s a simple plan though, and I’m lucky to be saving each month, but it makes me think I can afford to save more. Good find, Trent.

  2. Dan says:

    It is really fun to contemplate, but also remember that that 40% (well really 30 because of the fun money) also includes long term savings.

    When I did it for me, I’m not doing so bad. I’m actually close to the 30%, with the caveat that I’m sure I’m going to end up buying a bigger house, a replacement car, starting a family, etc. I won’t be able to keep up 30% for long. :(

  3. Sarah says:

    A problem I see here is that if you live in a high-tax area, 40% of your gross income can go to taxes to begin with–and he’s talking about *gross* income (he says so), not take-home pay. I’m not sure how anyone would manage to squeeze all his “committed expenses” besides taxes into 20% of his gross income.

  4. MossySF says:

    High tax areas also usually mean high income areas. The math works out as long as your non-tax expenses stay at a fixed amount instead of being a percentage of your income.

  5. Sarah says:

    High income areas are also high-*expense* areas. Although some living expenses will be roughly constant from area to area (phone bill), many of the big ones rise roughly in proportion to salary (rent, food).

  6. MossySF says:

    The ceiling for income goes up far higher than the floor for mandatory expenses. Not saying you can hit the 20% when you first graduate (although if you continue to live college-dorm-style) but after a decade or so of climbing the ranks, you may be close unless you also increase your lifestyle.

    High expense areas are usually major urban areas with more options that you may think. As an example, I remember reading an entry on SFMoneyMusings stating she spends an absurdly low amount ($5? $10?) on groceries each week by doing her shopping in Chinatown. My wife also shops for our food there so the few times we head to Safeway, she always mentions the price disparity. Safeway celery? $1.99. Chinatown celery? $0.79. Safeway watercress? Don’t even ask. Chinatown watercress? $0.40. (The list goes on and on…) And usually the shopping areas in big ethnic communities offer much more than just groceries. If you can find what you need there, it’s 50% off for goods or could be as low as 75% off for services. Example, a CPA in Chinatown might charge $80 versus $200 elsewhere.

  7. db says:

    Well, I just figured out that I’ve got my fixed expenses down to about 40% of my take-home pay, freeing up 60% for savings and debt repayment. Sometimes I bust out of that a little but if it fluctuates to 50/50 sometimes I guess I can give myself a break.


  8. Eric says:

    I have three simple questions

    Q1 – Do the “Committed expenses” from the article “A simpler way to save: The 60% Solution” include both fix and variable expenses?
    I mean, the Morgage is a fix expense and Clothing is a variable expense, but clothing is still a necessity. So is Clothing part of the 60%?

    Q2 – Some web sites include savings in the Committed expenses. Are they?

    Q3 – We are talking about
    60% of the gross income for Committed expenses
    and 10%(retirement) + 10% (long term) + 10%(short term) + 10%(fun)
    Are these 10% from the gross income too?



  9. Mike says:

    I read this article awhile back (the last post here is over 1 year ago). Here is what I do, a slight variance to this that has worked better for me:

    Gross Mo. Income $11,829
    Retirement savings $2,539
    Long-term savings $1,285
    ST Savings $907
    Committed expenses $5,599
    Discretionary expenses $1,500

    Retirement = Retirement Vehicles (401k, IRA, etc.)
    LT Savings = Emergency and LT Goals (Liquid Investments, HSA, Savings Account)
    ST Savings = Non-Monthly Bills (HOA expense, annual dues, significant house projects, etc.)
    Committed Expenses = Tax, Ins., Mortgage, Loans, Satellite TV,
    Discretionary = Food, clothes, fun money, minor household items, golf, dining out.

    I use two checking accounts: #1 for Discretionary Expenses and #2 for Committed Expenses (that are not withdrawn already from my paycheck). I fund only the amount needed every two weeks (1 months expenses/2) from my paycheck in Account #1 ($750 every two weeks). All the other money from my paycheck goes into Checking Account 2. From #2, I automatically pay every bill, or automatically transfer money to my savings/investment accounts.

    This process entirely automates the money process and it works extraordinarily well. I have be able to get out of a lot debt through this method.

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