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In “How We Do It” I touch on my interpretation of the “60% Solution” budget. I wanted to take a little time to go more deeply into how and why we use it.

We tried many forms of budgeting over the years including strict budgets ($50/week for food and not a penny more, etc), less-strict budgets (we’ll try for $200 to the credit card and cut elsewhere as needed), and loose budgets (eh, just spend whatever). None of these seemed to fit quite right for us. Finally we went to setting up a bill at the beginning of the month in Microsoft Money and we’d just reduce the amount left on that bill each time we bought something in that category until the end of the month. If we reached $0 before the end of the month, we’d stop buying in that category or just take it off of next month’s bill. For example, we put in a bill for “Household” for $300 on the first of the month. As we buy things we consider household, we reduce the bill. So if we buy $20 of toilet paper, we reduce the remaining Household bill to $280. This has worked fine for a couple of years but still didn’t quite lend itself to more structure and setting goals.

Then I found the “60% Solution” and it just clicked for me. It covered everything I had floating around in my head but couldn’t quite structure on my own. On a monthly basis, the basics are:

• Spend 60% of your gross income on Committed Expenses
• Put 10% of your gross income aside for Irregular Expenses
• Put 10% of your gross income aside for Retirement savings
• Put 10% of your gross income aside for Long-Term Expenses
• Spend 10% of your gross income on Fun

While these numbers are great, they’re a bit of a stretch for us right now. However, the above is our goal allocation. We’ve modified the plan as follows:

• 75% for Committed Expenses
• 5% for Irregular Expenses
• 5% for Fun
• 7.2% for Retirement
• 7.8% for Savings & Debt

We changed Long-Term Savings to Savings & Debt. The plan is to take this money and put it in a high-yield savings account, then when it is enough, we’ll pay off a debt with it. While we’re saving to pay the debt the account acts as an emergency fund. This doesn’t get us the absolute most bang for our buck if the interest rate on the debt is higher than the interest rate on the savings account, but it does give us the peace of mind of having a large emergency fund most of the time. Once a debt is retired the payment that was going for that debt comes off of Committed Expenses and goes to Savings & Debt. Once all debts but the mortgage are gone we’ll be to our 60% goal for Committed Expenses and then we can tweak the other categories around as we see fit.

Here’s how we define the categories:

• Committed Expenses: debt payments, food, taxes, cable TV, Internet access, telephone, pre-school, anything needed to live our lifestyle day-to-day
• Irregular Expenses: house repairs, car repairs, maintenance items, clothing for the adults, anything we don’t regularly spend money on but occasionally need to
• Fun: dining out, going to the movies, buying DVDs, golf, goofing off - we debated putting cable TV here, but for now it’s under Committed Expenses
• Retirement: consists entirely of my 401(k) contributions and my employer’s match (which we count as gross income)
• Savings & Debt: most of this goes to debt, $200 each month goes into the kid’s 529 plans for college

This budget works for us for a number of reasons:

1. We spent years being frugal(ish) and not buying things that we wanted or going out and having fun. This budget gives us a small amount of money to have fun with every month and that is very important to us right now.
2. It allows us to save for retirement and pay off debt at the same time. Granted my 401(k) contributions are only enough to max out the employer match right now, but once that nasty debt is gone we can really crank them up.
3. Once the debt is gone we won’t have to make any changes to start building some passive income. The Savings & Debt account will just get used to buy assets that produce income.
4. It allows us to have an emergency fund and a chunk of money to pay for the odd stuff that comes up every now and then. Under our plan the size of our emergency fund varies, but the Irregular Expenses account seems to grow quite well. Eventually this will become our sole emergency fund.
5. We have freedom. We’re meeting all of our obligations, working towards our goals and still having fun. Never underestimate the importance of freedom and having fun.

We’re too laid back for a strict budget but too structured and goal-oriented to not have any plan. This budget is perfect for us and meets all of our needs right now. It’s also flexible enough that we can tweak where the money goes without too much pain. Finally, using Microsoft Money with this budget plan built right in allows us to simplify tracking everything. It’s a win-win situation for us and our finances.

If you want more detail on how we use the “60% Solution” or have any questions, don’t hesitate to contact me.