I’ve been living by the 60/40 budget rule for over three years. I had read about this topic in a magazine article and in a conversation with a colleague, I discovered a simple system that my colleague has been using for years.
The rule (60%)
The 60/40 rule simply says that 60% of your gross income must go toward fixed or committed expenses. These expenses are your overhead, that is, the basic things you must pay to survive. They include:
• Basic food and clothing needs.
• Rent or Mortgage
• Services (electricity, water, internet, cable subscription, etc.)
• Insurance premiums.
• Charitable contributions.
It sounds simple enough, but in my experience putting all committed expenses at 60% of my income was a hard thing to do. But do not give up as it is very possible to achieve it.
The rule (40%)
The other half of the equation is the 40% which is divided into four categories of 10%.
• Retirement: Money set aside in your IRA or 401(k) plans.
• Long-term savings: money set aside for car purchases, major home repairs, or paying off debts like credit cards, mortgages, etc.
• Irregular expenses: Vacations, car repairs, new appliances, etc.
• Play Money: The Big Part! Do what you want with this money! Just make sure this category applies to your whole family, like going out to dinner, a day of shopping at the mall, your hobbies, etc. But also remember that having fun with your friends, kids, and family doesn’t have to be expensive!
what to ask you
• Are you renting a place or have a mortgage you can’t afford? Is it worth moving to a smaller place or further away to save? How much money will you save if you do this?
• Are your car payments too high? How is the fuel consumption of your car?
• Do you have too many paid subscriptions that you don’t really use? (Satellite TV, club memberships, etc.)
• How is your lifestyle? How much do you spend in a week, eating out, traveling, etc.?
• Do you wear designer clothes? Where do you buy?
• Can you afford to buy your coffee or lunch somewhere cheaper?