April 2006 Comparison to the 60% Solution…

60% Solution Plan: The idea is to keep committed expenses to 60% of your gross income and divide the remaining 40% into Fun Money, Irregular Expenses, Long-term Savings or Debt Repayment, and Retirement.

Committed Expenses: Basic food and clothing needs, essential household expenses, insurance premiums, charitable contributions, all bills including non-essentials such as cable, and all taxes, dues, and social security.

Fun Money: Anything you want to spend money on but capped at 10% of gross income.

Irregular Expenses: Vacation, repairs, appliances, gifts, and other less predictable expenses.

Long-Term Savings or Debt Repayment: Long-term savings are automatically deducted to buy long-term investments that are less liquid such as stocks. The idea is to make it harder to spend the money but if necessary the assets can be liquidated and the funds wired to your account. Debt repayment is self-explanatory and can include student loans and/or credit card payments.

Retirement: Retirement contributions to a retirement plan such as a 401k or 403b.

This plan basically has the pay yourself first feature build in. You automate virtually everything. The 20% savings like 401k contributions and long-term savings are automatically deducted. Then you have 60% for committed expenses and the remaining 20% for fun money and irregular expenses.

How I stack up: Basically I don’t. My committed expenses are way too high. Also under the 60% solution, I include my monthly hair appointments and groceries in my committed expenses whereas under the Debt Diet plan, I classify those expenses as Personal Expenses. So basically, the 60% solution is more flexible than the Debt Diet plan, which is why in the short-term the Debt Diet plan would be best to curtail my personal expenditure so that I can contribute more towards debt repayment.

In the long-term, I am hoping to bring my spending more in line with the 60% Solution because it completely takes the thinking out of it. I won’t ever allocate more than 20% towards fun money and irregular expenses so once my student loans are repaid, all of the extra cash flow will go directly into long-term savings and retirement contributions.