Twenty years of complicated
budget calculations have led me to this one simple conclusion: By
limiting all essential spending to 60% of total income, savings
By Richard Jenkins
How many of you have tried
budgeting and think it's a waste of time? Come on, let's see those
OK, that's just about everybody.
I've kept a budget of one
kind or another, first on paper and then with the help of various
software programs, for about 20 years -- despite a strong suspicion
that I was wasting my time. The illusion of control, I argued to
myself, was better than none at all.
My approach to budgeting
was to carefully track my spending during the month and to adjust
my budget targets up and down in each category, so that my total
expenses never exceeded my income.
Laborious? You bet.
After two decades of this,
though, I started to wonder if there isn't an easier, more effective
way to budget. I realized that the hardest part about keeping a
budget is getting useful information from it. There's too much detail
and not enough bottom line. My answer is "the 60% solution,"
a faster and easier way to structure your budget without having
to account for every penny.
What you're trying to do
with a budget is to prevent overspending, which ultimately leads
to piling up debt. Contrary to the way most people budget, however,
it rarely matters what you're overspending on -- dining out, entertainment,
clothes. Who cares? It's still debt, right?
Looking at my own spending
history, I realized that it wasn't the little luxuries here and
there that got me in trouble. It was the large, irregular expenses,
like vacations, major repairs and the holidays that did all the
damage. To avoid overspending, I had to do a better job of planning
And then there were the really
big expenses: buying a car, putting a down payment on a new home
or putting a new roof on an old home -- all of which can run into
the tens of thousands of dollars. They also can often be postponed,
sometimes for years, which theoretically should give me a chance
to save for them.
Understand your committed
As I looked back over the
past 20 years of budgeting, I saw that there were a few years when
my wife and I believed we were fairly on top of things, even with
a much lower income than we have today. How did we manage?
The key was a drop in our
fixed monthly expenses. It was a period when declining interest
rates had lowered our adjustable-rate mortgage payment to about
15% of our household income. That left us with some extra money
each month to set aside in a savings account for those irregular
We later moved to a bigger
house with a much bigger mortgage payment, higher maintenance costs
and utility bills, and obscene property taxes. The monthly mortgage
payment was only 20% of our gross income, far lower than the 33%
that most lenders will allow, but, suddenly, we were struggling
Even after refinancing our
mortgage at a lower rate, we were still often running out of cash
before the end of the month. I realized that other fixed expenses
had crept upward over the years. As my children, Natalie, now 16,
and Jackson, 13, have gotten older, they need things like music
lessons and sports equipment that add several hundred dollars a
month to our basic expenses. They're also outgrowing clothes faster
than we can buy them.
The slow but steady growth
in our monthly spending commitments was putting a squeeze on our
budget. I call these "committed" expenses rather than
"fixed" or "non-discretionary" expenses, because
things like music lessons are neither fixed in amount nor absolute
necessities, but rather are commitments my wife and I have made
to provide for our children.
The 60% solution
After analyzing our spending
patterns over the past couple of years using our 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. Those expenses include:
- Basic food and clothing needs.
- Essential household expenses.
- Insurance premiums.
- All of our bills -- even such non-essentials as our satellite
- 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:
consisting entirely of my 401(k) contribution, which is
subtracted automatically from my paycheck.
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.
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.
which we can spend on anything we like during the month, so long
as the total doesn't exceed 10% of my income.
You may have noticed that
only 70% of my paycheck is used for everyday expenses. Since we
never see the other 30%, my wife and I generally don't miss it.
We don't really need to track
our expenses, because our checking account balance is generally
equal to the amount of money we can spend. That's the way a lot
of people do it, but they don't first make provision for savings.
The key is keeping a lid
on those committed expenses. You can categorize them if you want,
but it isn't really necessary. In fact, you could make a budget
with just three categories: committed expenses, fun money and irregular
expenses, and that's just what I've done with the budget in Money
2004 (see chart below). (I can't really give up my anal-compulsive
ways completely, so I've also created a set of subcategories to
track the committed expenses, partly because that also allows me
to export parts of my spending data to a tax program at the end
of the year.)