Building Savings Without Sweating Every Penny: A New Approach

If you've ever started budgeting and recording your expenses just to drop it after a month, you need an easier solution. Forget tracking every penny--there's an easier way to spend and save.

The problem with a budget is that everyone starts with the best of intentions. You collect receipts, dutifully enter or review expenses, and tag each expense with one of 100 spending categories. You can make charts and graphs with your data, and for while your finances are updated and organized. Life is good.

But eventually life gets in the way. You forget to stay on top of recording your finances for a day or two, two days turn into a week, a week becomes a month. You're so far behind that catching up seems overwhelming.

Building a Simple Budget

If you've started and stopped budgeting more times than you can count, you need a simpler solution. Richard Jenkins, former editor-in-chief of MSN Money, kept a detailed budget--maybe too detailed--for more than 20 years.

Jenkins writes, "After two decades of this, though, I started to wonder if there isn't an easier, more effective way to budget. I realized that the hardest part about keeping a budget is getting useful information from it. There's too much detail and not enough bottom line."

His answer was the 60% solution, a budgeting method that quickly became popular for its simplicity--no need to track every red cent and tag it with a spending category. "Looking at my own spending history," writes Jenkins, "I realized that it wasn't the little luxuries here and there that got me in trouble. It was the large, irregular expenses, like vacations, major repairs, and the holidays that did all the damage. To avoid overspending, I had to do a better job of planning for those."

Identify Your Committed Expenses

With 20 years of financial data, Jenkins saw that when he and his wife felt like they were struggling financially, it was because their fixed monthly expenses took a higher proportion of their paychecks. In fact, there were times in their lives when they made less money but felt more on top of their finances because their housing costs and everyday bills were a smaller percentage of their expenses.

He determined that they needed to keep what he terms "committed expenses" to 60% or less of their income to feel in control of his finances. Committed expenses include the following:

• Mortgage or rent payments
• All bills--from automobile loan payments to non-essentials like Netflix and cable
• Taxes
• Insurance
• Groceries
• Basic clothing needs

You can use your account statements to roughly estimate how much you spend each month on committed expenses, then divide that figure by your monthly income.

The Other 40 Percent

So what about the remaining 40%? Jenkins divided it up into the following four categories:

1. 10% for retirement savings. Stash this cash in a 401(k), IRA, or other retirement vehicle.
2. 10% for long-term savings. This money doesn't need to be so easily accessible, so consider checking the current interest rates on CDs and comparing them against the best interest rates on savings and money market accounts. If you invest in the stock market, that money should come from this 10%.
3. 10% for short-term savings. Short-term savings means savings earmarked for irregular expenses--travel, auto repairs, holiday gifts, larger home maintenance expenses, etc. This money needs to be easily accessible, so compare money market rates and either traditional or online savings account rates to find a high interest account that works best for you. Both of these types of deposit accounts give you fast access to your cash.
4. 10% for fun money. Most of us don't need to be told what to do with fun money! This chunk of cash is for anything you want to spend money on during the month. No restrictions, so long as it doesn't exceed 10% of your income.

Making Your Way to 60 Percent

Of course, the 60% figure isn't set in stone. Your situation will determine the right percentage for you. But if your committed expenses are quite a bit higher, it's time to look for places to cut back. Housing is a huge expense, so start there. Could you move to a smaller place, take on a roommate, or rent a room? What about your car--are the payments eating up a huge chunk of your income? Could you sell it and buy something more affordable?

Brainstorm ways to bring down your percentage of committed expenses, and focus on the biggest ones first. Bringing your lunch to work won't help much if your car payment is 20% of your take-home pay.

Automate for Success

Once you've got your accounts in place, automate your savings. If you stick with your budget, you only need 70% of your income in your checking account (committed expenses plus fun money). The rest is savings that can be directly deposited into dedicated accounts you've set up. If the money never reaches your checking account, you'll be less tempted to spend it.

Jenkins' method helps you to stay on budget without tediously tracking every purchase, and that simplicity can be the road to long-term success for you. Besides, why would you want to spend the weekend sorting through a mess of expenses when you could be out spending your fun money?

• Get started saving by finding the best savings account now
• See all articles