More on the 60% Solution – How I measure Up

Posted by Mike Smith :: November 1, 2007 @ 6:55 am

I’ve been thinking about the 60% Solution method of budgeting ever since I wrote about it in a recent post. While I use a more formal budget, I still thought it would be interesting to see how well my expenses conform to the 60% solution. This exercise may inspire other Lending Club users to evaluate their finances in the same way when they realize how easy it can be.

The 60%
Remember that the main point of the 60% solution is to keep your committed expenses at or below 60% of your gross income. As a reminder, committed expenses include bills, food, clothing, essential housing expenses, insurance, charitable contributions, and taxes. Here’s how my expenses broke down, as a percent of my gross (pre-tax) income:

The total of my committed expenses is 52.9%, so that falls within the 60% guidelines.

The Other 40%
The 60% Solution calls for the remainder of your money to go to four different areas, which each getting 10%. These areas, in order of priority, are retirement, long-term savings, short-term savings, and fun. Here’s my breakdown:

Analysis
If I were to strictly follow the 60% Solution guidelines, then I would be able to add 7.1% to my committed expenses. I would also be able to cut back my long-term savings to 10% and increase my short-term and fun spending. If I were to keep my committed expenses where they are, then I should probably allocate more towards my retirement and scale back my long-term savings a little.

The matter is somewhat more complicated by the fact that although I only contribute 10% of my gross income to retirement, my company matching kicks in another 6%. So having 16% going to retirement, I’m comfortable with having such a high allocation towards long-term savings.

That helps to make my final point about the 60% Solution, or any budgeting method you follow: budgeting methods should be used merely as a guideline for your finances. You’ll need to modify the method to fit your circumstances for them to have the best effect.

As the creator of the 60% Solution said, “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.”

You’ve read about P2P loans from Lending Club helping people refinance their credit cards to help them get out of debt more quickly. This, and other methods of reducing committed expenses, will help you on your way to finding your own ideal budgeting solution.

While I’m planning to stick to my formal budgeting techniques, evaluating my finances with the 60% Solution was nonetheless insightful and may be beneficial to you as well.