I have been living on the 60/40 budgeting rule for more than three years now. I had read on this subject in a magazine article and in a conversation with a colleague, I found out a simple system in which my colleague has been using for years.
The Rule (60%)
The 60/40 rule simply says that 60% of your gross income should go to Committed or Fixed expenses. These expenses are your Overhead expenses, meaning the basic things you need to pay to survive. They include:
• Basic food and clothing needs.
• Rent or Mortgage
• Utilities (electricity, water, internet, cable subscription etc.)
• Insurance premiums.
• Charitable contributions.
It looks simple enough but in my experience putting all committed expenses into 60% of my income was a tough thing to do. But do not give up as it is very possible to achieve this.
The Rule (40%)
The other half of the equation is the 40% which is divided into four 10% categories.
• Retirement: Money set out into your IRA or 401 (k) plans.
• Long-term savings: Money set aside for car purchases, major home repairs, or to pay down debts such as credit cards, mortgages, etc.
• Irregular expenses: Vacations, car repairs, new appliances, etc.
• Fun money: The great part! Do anything you want with this money! Just be sure that this category applies to your whole family such as dining out, a day in the mall shopping, your hobbies etc. But also remember that having fun with your friends, children and family does not have to be costly!
What to Ask Yourself
• Are you renting a place or have a mortgage that you can not afford? Is it worth it move to a smaller place or farther place to save up? How much money will you save if you do so?
• Are your car payments too high? How is the fuel consumption of your car?
• Do you have too many paid subscriptions that you do not really use? (Satellite TV, club memberships etc.)
• What is your lifestyle like? How much do you spend in a week, eating out, going on trips etc?
• Do you wear designer clothes? Where do you shop?
• Can you afford to get your coffee or lunch at a cheaper place?