Posts Tagged ‘simplify a budget plan’

The 60-40 Method – The Best Way To Simplify Your Budget Plan

There can be an array of different ideas on how to simplify or structure your budget plan, but I have found the 60-40 method the best one. As per this method, you have to restrict your “essential” expenses to 60% of what you earn every month (your regular monthly income). When you do that and use the remaining 40% the way it has been described below, you will see how your savings start soaring quickly with every passing month. Budgeting is one of those few things that almost everyone tries but very few actually succeed. Those who fail start treating it as a mere waste of time. And, those who succeed know it is worth spending some time to plan and update a budget, as it plays a critical role in achieving and maintaining financial freedom. Following is a brief rundown on how you have to use this 60-40 method.

Understand Your “Essential” Expenses And Use 60% Of Your Total Monthly Income Toward It

Your essential expenses may include things like transportation, Internet, insurance, utilities, food, housing, all your taxes, and even your charitable contributions. But, before we proceed, it is very important for you to understand that 60% is not a magic number. For me and my family, it really works. For you and your family, it is quite okay if the actual limit is a bit higher or a bit lower. The point is that you need a limit for your essential monthly expenses in your budget plan and that limit must be close to 60% of your gross monthly income. Some of you might find it an impossible task to reduce your committed expenses to as low as 60% of what you earn. If that is the case with you, it indicates a few things – there is a huge “ugly” gap between your lifestyle and what you earn, you are sending your children to unreasonably expensive private schools (something you cannot really afford), you are having a very expensive boat or vehicle and you have committed for larger monthly payments on these assets than you can afford, or probably you are living in a home that is more expensive than your paycheck can afford. If any of these things is true in your case, you know what you have to do – you will have to learn and start living within your means. Choose a more appropriate house, a more appropriate car, a more appropriate school for your children, and also a more appropriate lifestyle. You must have a clear idea on where your money is going and whether it is going for a valid reason. Get a pen and paper and do a thorough analysis; you will definitely find your way.

Now, here are the details on how to use the remaining 40%.

10% On Retirement Savings

To ensure successful implementation of your , you must consider setting up a system either with your employer or with your checking bank account that 10% of your paycheck must automatically be deducted and transferred to a 401k contribution.

10% On Long-Term Savings

No budgeting can ever be successful if it does not include building a healthy emergency fund. You need two types of savings for financial emergencies – long-term savings and short-term savings. Allot 10% of your monthly income for long-term savings. For this, you can consider investing in something like an index fund or stocks.

10% On Short-Term Savings

You also need to save additional 10% of what you earn to meet temporary financial emergencies, which can include periodic expenses like gifts (for Christmas, birthdays, anniversaries), home maintenance, maintenance cost on household appliances, unexpected medical expenses, car repair, or any other such thing. Having this 10% always in your budget plan will never require you to borrow risky yet lucrative payday loans, which can literally ruin your financial life when you fail to repay the same in time.

10% On Fun And Entertainment

Most budgeting plans fail because they are not practical. A practical plan must have some room for fun and entertainment also. In fact, the primary reason why many people hate the B-word of budgeting is because they think budgeting means eliminating fun and entertainment from life. Therefore, make sure that you have a 10% quota for fun and entertainment also. You can use this amount to do anything you like during the month. As long as you do not exceed the 10% limit, you will be fine.

What If You Are In Debt (other than usual mortgage or car loan, such as payday loan debt)?

You will really have a very tough time restricting your essential expenses to just 60% of the total monthly income if you owe certain debts other than the usually essential mortgage and car loan. If you are in a situation like this, you are recommended not to put your other debt liabilities in the “essential” expenses column. I know the repayment of these debts is also essential, but for this, you should use money from your 40% quota. But again, leave that 10% for fun and entertainment and 10% for short-term savings untouched. You can use the remaining 20% (10% retirement savings and 10% long-term savings) to pay off these debts. must be your first priority. Once these debts are paid off, you can again build your retirement and long-term savings fund.

Overall, the best thing about this 60-40 method is that when you implement it thoroughly, you no more need to keep tracking your expenses every month. If you want to lose weight, you do not really need to keep on counting your calories. The more important thing is whether the weight-loss regime you are following is well structured or not. The same thing applies with a budget plan also. If you have a simplified and well-structured plan, you will never fail and will always enjoy a smooth financial life.

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