Simply your budget with the 60-40 method

Have you ever set a personal budget for yourself? Are you still sticking to it? My guess is that you answered these questions in a sequence of “yes” to the first, and “no” to the second. We all intend to spend our money wisely in accordance with our plan, but it hardly ever happens that way. Budgeting is something everyone tries but very few actually succeed. And, those who do succeed know it is worth spending the time to plan and update a budget, as it plays a critical role in achieving and maintaining financial soundness.

There are many ways to simplify or structure your budget plan, and what follows is a brief explanation on the 60-40 method and how to use it.

Overhead / essential expenses – 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. Your essential (overhead) expenses may include things like transportation, Internet, insurance, utilities, food, and housing. You should aim to limit for your essential monthly expenses in your budget plan to close to 60% of your gross monthly income.

The remaining 40% gets divided into four chunks of 10% each, listed here:

10% on Retirement Savings – To ensure successful implementation of your budget plan, you should make arrangements to contribute 10% of your salary into superannuation (ensuring you are within you contribution limits).

10% on Long-Term Savings – Allocate 10% of your monthly income for long-term savings and investments. This could include property, shares, managed investments etc.

10% on Short-Term Savings – This could be used to pay for holidays, repairs, new appliances, gifts and other irregular but somewhat predictable expenses.

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. In fact, the primary reason many people hate the B-word of budgeting is the perception that budgeting means eliminating fun and entertainment from life.

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

If you have a high amount of non-mortgage debt, the 20% apportioned to retirement and long-term savings could be directed towards paying off debt. Once the debt is paid off, the 20% (taken from Retirement + Savings) should be redirected to the original categories without delay.

Every budget must start from the same place: figure out how much you’re making and how much you’re spending each month. Knowing where your money goes, shows you where you need to cut back to pay off your debt and contribute to your savings and investments. You may be surprised to find that little luxuries can really add up over the course of a month.

Setting a budget is the crucial Step One to financial soundness. Seek help with your budget if you are unsure how to go about it. Our first meeting is complimentary and we’ll be pleased to assist you.

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