Simplifying Your Budget with The 60% Solution

Posted by Mike Smith :: October 23, 2007 @ 6:32 am

Nearly every week, at least one of the contributors to the Lending Club blog mentions the importance of a budget. By now, you should realize that we discuss it so often because it is one of the most important aspects of a sound financial philosophy. Even if the minutia of tracking every penny is more than you can handle, you should still have a budget. For you, The 60% Solution may be the way to go.

The 60% Solution was created by Richard Jenkins and is described in detail in his article on the subject. The beauty of this budgeting method is its simplicity: Keep your committed expenses at or below 60% of your gross income. We'll go into a little more detail below, but that's the basic premise of this technique. Budgeting couldn't get much simpler than that, right?

The first question that usually comes up with this approach is how to define “committed” expenses. In addition to all of his monthly bills, Richard also includes food, clothing, essential housing expenses, insurance, charitable contributions, and taxes.

The remaining 40% of his gross income is then divided into four other areas that get 10% each. These categories, in priority order, are as follows:

Retirement Savings – 401K, IRAs, etc.
Long-Term Savings – Investments, Lending Club P2P loan portfolios, etc.
Short-Term Saving for Irregular Expenses – Vacations, car repairs, gifts, etc.
Fun Money – Anything you like

This technique follows the “pay yourself first” philosophy too, because savings are pre-allocated each month. You'll get used to living on your income without the amounts allocated to savings and likely won't even notice the difference.

The importance of a budget is often stressed, but not always followed. If a traditional budget seems too difficult for you, then you should consider a simple budgeting method like The 60% Solution.