How to Make A Budget | The 60% Solution Explained

Summary

In this video, Daniel explains the 60% solution budgeting method developed by Richard Jenkins. The method suggests allocating 60% of your gross income for committed expenses, including bills and taxes, while the remaining 40% is divided into four categories: retirement savings, long-term savings, short-term savings, and fun money. This budget is ideal for individuals who struggle with big, irregular expenses, like buying a car or home. However, it may not be effective for those prone to impulse buying or those needing a more aggressive retirement savings strategy. Adjusting the percentages could be necessary depending on personal financial goals.

Takeaways

• 😀 The 60% Solution is a budgeting method created by Richard Jenkins, MSN Money's former editor-in-chief, designed to simplify budgeting.
• 😀 According to Jenkins, traditional budgeting methods of tracking every expense can be tedious and ineffective for some people.
• 😀 The 60% Solution suggests that 60% of your gross income should go toward committed expenses, including bills, taxes, and necessary living costs.
• 😀 Committed expenses encompass essential needs such as food, shelter, utilities, and taxes, which many people overlook when budgeting.
• 😀 The remaining 40% of income is divided into four categories: 10% for retirement savings, 10% for long-term savings, 10% for short-term savings, and 10% for fun money.
• 😀 Jenkins emphasizes that the goal of budgeting is to prevent overspending, which ultimately leads to debt, regardless of the type of expense.
• 😀 Large, irregular expenses such as vacations or car repairs are often more damaging than smaller, impulse purchases. Short-term savings are meant to cover these costs.
• 😀 Long-term savings are intended for bigger financial goals like buying a car or a home, which can require significant amounts of money.
• 😀 The 60% Solution may work best for individuals who struggle with large, irregular expenses but maintain control over day-to-day spending.
• 😀 People who tend to impulse-buy frequently may find the 60% Solution challenging to follow, as it requires careful allocation of the 40% remaining after committed expenses.
• 😀 While Jenkins recommends saving 10% of income for retirement, this may not be sufficient for a secure retirement, and the percentage may need to be adjusted over time.

Q & A

What is the 60% solution in budgeting?

The 60% solution is a budgeting method where 60% of your gross income goes toward committed expenses, such as housing, utilities, and taxes. The remaining 40% is divided equally into four categories: 10% for retirement savings, 10% for long-term savings, 10% for short-term savings, and 10% for fun money.

Who created the 60% solution and why?

The 60% solution was created by Richard Jenkins, who was the editor-in-chief of MSN Money. He developed the method after realizing that traditional budgeting, which involves tracking every expense meticulously, wasn't working effectively for him. The 60% solution aimed to simplify budgeting and prevent overspending.

What are 'committed expenses' in the 60% solution?

Committed expenses are the essential and ongoing costs that are required to maintain basic living standards. These include rent or mortgage, utilities, taxes, and any other recurring bills, such as cable and subscription services.

How is the 40% of income allocated in the 60% solution?

The remaining 40% of your income is split equally into four categories: 10% for retirement savings, 10% for long-term savings (for large future expenses like buying a car or home), 10% for short-term savings (for irregular expenses like vacations or repairs), and 10% for fun money (to spend on anything enjoyable).

What is the purpose of fun money in the 60% solution?

Fun money is allocated to ensure that individuals can still enjoy themselves without overspending. It’s meant for discretionary spending, such as entertainment, hobbies, or other non-essential purchases, to help maintain a balanced lifestyle while budgeting.

Why does Jenkins suggest that the 60% solution may not work for everyone?

The 60% solution may not work for everyone, especially for those who tend to impulse buy. If someone frequently makes spontaneous purchases, they may struggle to keep their committed expenses within the 60% limit, leading to potential financial strain.

What is the potential issue with saving only 10% of your income for retirement?

Saving 10% of your income for retirement might not be sufficient for everyone. Using the 4% rule, which helps estimate how much you need to retire comfortably, saving only 10% could require working over 50 years to retire comfortably, which may not be realistic for many people.

What kind of expenses does Jenkins consider to be the most damaging to one's finances?

Jenkins believes that large, irregular expenses, such as vacations, car repairs, or buying a home, are the most damaging to finances. These kinds of expenses can be difficult to plan for, and they often lead to financial instability if not accounted for properly.

What is the advantage of using the 60% solution over traditional budgeting methods?

The advantage of the 60% solution is its simplicity. Unlike traditional budgeting methods that require meticulous tracking of every expense, the 60% solution provides a more straightforward framework that focuses on managing major expenses while still allowing for savings and fun.

How does the 60% solution help prevent overspending?

By dividing income into clearly defined categories (committed expenses, savings, and fun), the 60% solution helps prevent overspending by ensuring that essential expenses and savings goals are prioritized, leaving only a fixed portion for discretionary spending, which helps avoid impulse purchases.