The 60% solution is a budgeting method that suggests allocating 60% of your income to fixed and essential expenses, such as housing, transportation, food and healthcare. The remaining 40% of your income is then divided between savings and non-essential expenses, such as entertainment, dining out and shopping.
The idea behind this method is that by allocating 60% of your income to essential expenses, you can make sure that your basic needs are met and that you are saving enough to reach your financial goals. The remaining 40% of your income is divided equally into four different categories, with each category allocated 10%. They are:
Long-term savings: This is your emergency fund and money for long-term investments.
Short-term savings: This category is to be put into a separate account where it can be simply accessed to transfer funds to your everyday account. The money in this category is used for things such as vacations, irregular expenses, and larger wants. The idea is to be able to spend all of this money over the course of a year.
Retirement: This is your superannuation fund or a form of long-term investment that you intend to utilise for retirement. Salary sacrificing 10% of your income is a simple way to achieve this.
Fun money: The final 10% is where the “wants” come in. Fun money covers all unnecessary expenses such as dining out or buying some new shoes. The 60% solution is a relatively simple and easy to follow method. It can be a good starting point for those who are new to budgeting. It is also flexible enough to be adapted to different income levels and expenses. It also prioritises essential expenses over non-essential expenses, which can help you stay on track with your financial goals.
Who should try this method?
If you’re someone who enjoys automating things, this method is a great way to increase your savings. If the 50/30/20 method does not allow you to pay your bills and necessary expenses comfortably, then this method may be perfect as it allows another 10% of your income to be used for bills.
Considerations
There are many considerations to take into account when utilising the 60% solution method. These include:
Track your expenses: Although 60% of your income goes towards fixed and essential expenses, it is important that you still track these expenses. Although 60% may sound like a lot, there is still a chance that you will go over the 60% without even knowing.
Don’t spend it if you don’t need to: This relates to many other budgeting methods as well. Just because there is 10% of allocated money for fun, if you don’t feel the need to use it that pay cycle, then don’t. Rather than spending the money for the sake of it, add it to either your short or long-term investments.
Retirement may not require 10%: Living in Australia has many benefits for its working citizens. Our superannuation is quite good in comparison to many other parts of the world. If you don’t feel like it’s viable to salary sacrifice 10% into your super, then you can always lower it to 5% and spend the other 5% in another more important category. This is entirely dependent on your individual circumstances.