by Scott Pape - February 18th 2011
I’ve met people who track their spending on a spreadsheet. They tend to have names like Ian and Cheryl, and they bring homemade hummus and day-old bread to your barbie. Or worse, their home brew (‘It works out to be only eight cents a glass! Yes, and it tastes like it too, Ian.)
This is no way to live your life. Your daily latte won’t send you broke. To this day I’ve never, ever been able to stick to a budget – but I’ve compensated by letting technology do the heavy lifting for me.
It’s called the 60-20-20 plan – 60 per cent safety, 20 per cent savings, and 20 per cent splurging – and it’s the easiest way I know to manage your money.
Safety – 60 per cent
Safety means allocating 60 per cent of your take home on food, shelter and dog biscuits. All the things you need to live safely in the suburbs.
If you’re like most people it will divide up something like this:
- Mortgage: 30 per cent (but not if you’ve bought in Point Cook)
- Food: 15 per cent (or a bit more if you watch The Biggest Loser)
- Mobile and broadband: 5 per cent (unless you’re Stephen Conroy)
- Car: 10 per cent (unless you’re Bob Brown, who rides a bike)
Let’s talk dollars. An average couple pulling in a combined $120,000 a year (without any crying tax deductions – yet) takes home about $1,850 a week. So they would have to sock away:
- Mortgage: $555
- Food: $277
- Mobile and broadband: $90
- Car: $185
Knowing how much it costs to run You Inc is scary, but powerful – so work out your percentages. In times of trouble, this is the minimum amount you need to bring in to keep the lights on and the cat warm.
Savings: 20 per cent
Allocate 20 per cent of your hard-earned to savings.
Hang on a minute. If you’ve got any credit card debt or personal loans you’ll need to do the following:
First, save $2,000 into a Mojo account – a high-interest online savings account. For our average couple this would take them a little over six weeks to save (20 per cent of $1,850 = 370 x 6 = $2,220).
Second, start paying off your minor debts by attacking the smallest one first (say a parking fine), knocking it over, and then moving on to the next biggest one – and keep going. I call this method ‘domino your debts’, because you knock them down one by one. (By the way, your major debts, like HECS-HELP and the mortgage will obviously take longer.)
Now you’re (mostly) debt free, you can begin paying yourself – every dollar you put into your savings account is like getting a payrise at work without doing anything – it’s like being a politician.
The best legal tax dodge going around is superannuation – especially if you earn under $62,000. Call your fund and ask about chipping more into your fund via the Government’s co-contributions scheme.
Then you have a choice: you can aggressively pay down your mortgage (or if you’re renting, you can aggressively save for your deposit via a First Home Saver Account), or you can begin building an investment portfolio of direct shares. I do a mixture of both.
Splurge: 20 per cent
You are hereby directed to go out and blow 10 per cent of your money on crap that makes you feel good (shoes, booze, and anything else you want).
The other 10 per cent of your splurge money should go to longer-term splurges: overseas holidays, weddings, divorces, anything that is going to cost more than a few weeks’ wages.
For our couple, this means dinners to the value of $185 a week, and sticking another $185 into the Greek Island Getaway fund.
The best place for keeping your splurge funds is uBank, which is currently paying the highest rate of interest on the market (as at Feb 18th 2011), and lets you create sub-accounts for your different goals.
The key is to make sure your splurges don’t drain your bank. Think about the big goals you have over the next 12 months, and chunk them down to weekly amounts.
OK COMPUTER
Here’s you: “This sounds like a lot of, like, work.”
Here’s me: “Nope – the 60-20-20 plan puts your money on autopilot.”
That’s the beauty of this plan: once you’ve crunched some numbers and set up your accounts, the system runs itself. Best of all it’ll take you only ten minutes a month to monitor.
Here’s how to get started quick:
1. Over the first week keep tallying up your expenses (either with an old school pen and paper, or an iPhone app that tracks your spending), so you know where the dough is going. Relax, this isn’t a tut-tut judgmental stuff, just keeping a track on where you spend your money.
2. When you calculate your percentages for safety, savings and splurging, make a few calls to see if you can screw down your suppliers (see last week’s article for some money-saving scripts).
3. Keep a float of $500 in your savings account so you don’t accidentally overdraw and get hit with (unfair, perhaps illegal) fees.
4. For your 10 per cent ‘blow money’, physically take out cash each week. Get it in $10s and $20s. Then put it in an envelope and store it in your sock draw. It’s a psychological thing. Casinos use chips so you don’t freak out when you gamble away your (mother’s) rent, credit cards work the same way. (Case in point: the other week I bought something at Harvey Norman, and the pimply teenager at the checkout was like “Woah, dude, you’ve got, like, real money”.) Cold, hard cash is a lot harder to spend.
5. Once you have this plan in place you won’t have to worry about money again. That frees you up to focus on using the miracle of compound interest to turbocharge your wealth plans – which we’ll tackle next week.
Tread Your Own Path!
Shopping List:
1 X fee-free transaction account
1 X high-interest online savings account
1 X low-cost industry superannuation fund
1 X discount online sharebroker
1 X sock draw
Automate Your Money:
The 60-20-20 plan
- 60% Safety (all living expenses)
- 20% Savings (thinking ahead)
- 20% Splurge (things that make you smile)
Photo: http://www.flickr.com/photos/aye_shamus/2652670470/
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48 comments
Hi Scott,
I’ve tried applying a variation of the 60-20-20 rule to our finances (the balanced money formula 50% must-haves, 20% savings, 30% wants), and came up seriously out of whack with too many needs.
A big factor was insurance – health, home & contents, 2xcar, life, TPD, trauma. Perhaps it shows we are risk-averse, but I find it hard to get rid of any of these.
It has been suggested that imcome protection insurance may be an option (either on top of or a partial replacement for TPD & trauma).
I’m looking into changing super funds and changing to insurance that can be paid for from within super (the life, tpd and income protection).
I couldn’t find any articles discussing insurance on your site, so I’d be interested to hear your views.
I also recently discovered commission rebate companies (after being disturbed by the proposed fees from a financial adviser) – and thoughts on them?
Hey Kevin,
Scott’s just recently written an article all about insurances which you can read here.
Barefoot Ben
Love it! I have also heard of the 60-10-10-10-10 (and I think one of the 10′s was further separated into 5-5) but this is much simpler and easy to apply!
I think $90 a week on mobile and broadband is a bit extreme though? (My partner and I spend less than $100/month and we are on what I would consider as mid-range deals) Maybe if this was extended to include utilities the number would seem more reasonable?
Great advice! I heard an 80 -10-10 system on the radio today, but this sounds a bit more thought out
D.O.B 1/5/48. Receive part Disability Pension (Have M.S.) Work casual. Earn approx $500 p.w. No Super. Own Residence: Worth approx K275. Will sell at retirement age. Buying retirement cottage still owe K50. Savings: approx: K20. Should I join a Super fund to supplement pension income when I retire? If so, which do you reccommend? Thank you.
Hello Katherine,
I also have MS and as you are working part time did you know you can apply for the Mobility Allowance. (not income or assets tested) $80.50 per fortnight. This is to assist you getting to work. The Government wants to keep us in the work force for as long as possible. This is good as when you can’t work anymore life is difficult.
You can also claim the Mobility Allowance if you are completing 32 hours per month either in the paid work force or Voluntary work for a non profit organisation.
Contact Centrelink Disability Line 132717.
Have a look at http://www.pwms-v.org.au
Michelle
Hi Kathrine,
Re Joining a super fund. Depends on your age really. You need at least 10 years to gain from this super at the end, however, contributing yourself via salary sacrifice (reduces your tax by 15%) is in itself a saving directly to your pay packet. The compound interest of your contribution assists your balance of super and providing your investment choices are suitable to your age and risk comfort. I imagine you are a low income earner and all your income is precious so consider low risk investment options at around 4% above CPI and be prepared to see some loses from time to time as with any investment – watch for the big picture at the end. Also with regard to super is a gov’t incentive called Co-contribution for those with low income. Check it out ATO site. If you are working, your employer should be contributing 9% from their coffers toward your super – ask. I think you will find you already have a super account if your are working for an employer who has an ABN. Good luck with your decision.
Hi Scott
my name isn’t Cheryl, and I’m not married to Ian, and the last batch of home brew was OK…
while I think your budget idea is OK, it won’t work for a single income family with 8 kids at home, we will continue with our spreadsheets and live weekly
and the $$ for splurge are a pipe dream, as is any sort of holiday
i bet you have perhaps a better income than we do. never say it can’t be done. time to try in some sort of way.
Regardless whether it’s home brew or not Christine C, it’s time to give up alcohol altogether. Single income with a tight budget or dual income with a tight budget, if you’re raising a family you have no right to waste money and Centrelink Family Benefits on any alcohol whatsoever!
are you serious about your no drink comment? Surely one could indulge once in awhile even if it is for your healths sake!!!
Thanks for breaking down something that is a bit scary but necessary!
Do people really spend that much on food and telecoms in a week?? We spend less than half that on food and a third on phone and internet. But you seem to be missing a few pretty crucial running expenses – power, gas and water anyone? Or insurance (car, health, home, contents, life)? Or do you count them as a splurge cause I sure don’t enjoy having to spend money on them.
Thanks for the tips and guidelines! It’s great to have the 60-20-20 splits to aim for.
I personally don’t break my money down by percentages or have spreadsheets, I just have all the my expenses coming out of the bank account before I get to see it. I have become a huge fan of the banks automatic transfers.
Each payday I have money automatically going to my mojo account, my mortgage, my electricity, my phone, my internet and my future car and future holiday accounts. I am left with about $300 per fortnight which is my food and fun money. I am a single who likes to cook and doesnt drink or smoke so I have enough left over most fortnights that I can afford to go to the occasional concert or trip to Sydney etc.
It works for me because if I dont have the money, I cant spend it…and yes I have forgone the credit card so I cant be tempted to buy stuff I cant afford and lets face it, probably dont really need
I will admit that when I first did it, it was hard adjusting to not having the ability to steal from peter to pay paul but now that I have gotten used to it, its stress free and easy going.
Btw, my income is below the national average just like most of you, definitely not 6 figures or ever likely to be, but I have found that this way I actually feel wealthy.
And if you need more than 60 per cent to live on? We are one income with two small kids. Have to budget tightly but it is hard and time consuming.
Hi Ive just read your book and I love how you write. I live on DSP with FTB with two kids on my own with no other income so approx $1200. i love the 60/20/20 idea but it doesnt quite work as my costs take up about 80. But I do the 80/10/10 with 10 for savings for mojo account and holidays and 10 for extras and it seems to work ok. Its hard and i still budget and am living tin tomatos and carrots a fair bit till i pay my parents back but being debt free and seeing my savings grow is worth it.
Cheers
as a couple on dsp, carers allowance and some work, we have to make sure the mortgage is the first thing paid and we have it at $140K.
it is a great suggestion to do and everyone no matter their incomes should at least try it.
my quetion is it possible with the dsp, carers allowance and some working hours for one of us, to do something like this. we are already seeing moneycare to try and get back in the black/coping ourselves but when you have one dsp taken up for a mortgage repayment, it is hard esp when one partner may not be able to return to work, has a tpd payout from their super fund to live on for the rest of their life.
Hey BF, I Homebrew and my name is Ian, plus I do monitor my spending aswell. My Homebrew is better than any commercial crap, but then again I’m a proffesional homebrewer using allgrain method not malt extracts. I can clone Coopers Sparkling – Little Creatures Pale Ale and even Becks,”German Becks” yes I can also do great Lagers aswell. And it is cheaper, but have never done the numbers, because I much prefer drinking my own, as so do many others aswell. And I also do ride a pushbike. Have not owned a car for about 20 years. A car consumes alot of money.If you can do without a car you can increase your saving much more. Mountain Goat Brewery in Richmond Vic give their employees $1.50 a day for riding or using public transport to work. I think more company’s should subscribe to this practice.Less pollution and fitter healthier staff to boot.
What iPhone apps r u talking about, Scott?
where does utlities (electricity/gas) , insurance (house and content) comes in in the 60-20-20 rule?
Hi Scott,
Love the idea but can you extend it out to families with kids and their associated costs. I have three kids, one at a private high school and all three cost a fortune with the amount of sport they do. I would love to save more than we do but with rising food and utility costs it gets harder every year.
Whilst i like your plan and have read you books, listen to you on triple M and so forth and you have helped me a lot, i see some holes in your 60-20-20 plan. 60% for mortgage, car, phone/internet and so forth doesnt allow for gas, rates, car insurances, travel costs to work (liek etag), rego, tyres, servicing, home insurance – the list goes on. A couple pulling 120K paying a marginal rate of 30% tax leaves approx 1600 a week, not 1800.
what do you suggest, barefoot, for couples in more of a real situation? 60% wont cut it, especially if your McMansion is about $500 a week. That leaves really nothing for You Inc, (or worse if you have kids)as i see it. Keen to hear you thoughts on this.
hmm. I haven’t crunched the numbers my self… but I’m a little sceptical with regards to the prospect of home ownership given a max 20% savings rate, and max 30% on mortgage repayments… especially when given the ‘historic’ growth rate of housing over the last decade or so.. and current affordability…. ( I saw this list of ‘most affordable markets in aus’ recently… the most affordable had an income to price ratio of 4.2, which the article almost proudly states is classified as ‘seriously unaffordable’…)
care to paint a picture?
AWESOME, AWESOME, AWESOME that’s all people want, and that’s all I want. A simple system to handle your finances.
Cheers Scott
Hi Scott,
I commend the simple method as it works best. For most people i think it will work. But I do still love my spreadsheets thought i don’t forgo too much that i enjoy such as regular holidays.
Started something similar in 2002; by working out rough budget from bank statement and then making sure I had regular savings in place before splurging. I didn’t open as many accounts as the cost of opening extra accounts too high – just takes more discipline.
Haven’t paid credit card interest in more than a decade.
I survived with no car for 5 years and live well (still do).
I use mainly cash except for larger amounts when i use a credit card (always ask for a discount for bigger purchases).
But I did manage to save a 20% deposit for an apartment and fully paid for a second hand car (which i bought instead of n expensive sports car) in order to splash out on a professional camera kit where my real passion lies.
Still away to go and new goals to set but happiness is being in control of your life.
I only eat homemade hommus… tastes brilliant!!
I love all your tips… you’ve helping me come just 2 more payments away from paying down the car loan well ahead schedule!
Sounds great, however, what about the single wage earners (48,000) who have the same expenses apart from the grocery bill. I see a lot of advice and it is mainly directed at two income earners.
dear barefoot, do you have any advice for single mum of 3, starting again at 46, income of 39,000 per year, renting and no savings.. i do have a indrustry super that i put $20 a week in. but no savings…help
I love this budgeting idea! I think that breaking your budget down into individual catergories is way to time-consuming and restrictive.
I’ve worked out a variation on this that suits my purposes of 40-30-30. My expenses are pretty minimal which means that I can bump up the other areas. I think the key is to find the allocations that work best for you/your wage and expenses.
I fit in this category and this def works for me.
Actually, my current budget was already set an after calculating found it fit these percentages to a tee!
Saving for a first home so sometimes when it’s a quiet social month I stash more of the play money into savings
Hi Scott, really like the idea of the 60-20-20 plan and just want to clarify how to take into account emergency or unplanned lump sum expenses, I assume this would just come from savings or debt if desperate, thks Matt
Thanks excellent article; passed on to my 19 year old daughter & her boyfriend, settlment on their first block of land finalised and house building is weeks away.
Hi Scott,
What did you mean by ‘Mortgage: 30 per cent (but not if you’ve bought in Point Cook)’? What’s the story with buying in Point Cook?
I would really appreciate your response when you get a minute.
Regards
Gordana
Scott, just wondering if you have heard much about Vector Vest Australia. I have some money in my mojo acc to invest and want to know if I should go with someone like them or try my luck with an online broker like etrade .
Hi Scott
I love your comments and articles but i seem to think that you forget us singles who earn $45K, owe Mortgages (larger than some married couples with kids and dont have that disposable income of both salaries) and who have had to use dead money (credit cards) to pay for large annual expenses that are outside our reach due to the limited income avaialble . Your 60-20-20 rule is near impossible. After the mortgage payment i am left with $450 a fortnight how do i break that down into a more livable equation without it causing sleepless nights as it does now.
Great advice Scott. Have been doing this for years and have had a holiday overseas every year for about the last five years. In fact am writing this from Sarlat in France. The great thing for this holiday was that we used points built up on Amex to cash in for Foreign exchange…. About $600 Euro and some Singapore $ as well. Never ever pay interest on the card so its free holiday money… A big bonus. I know its hard for families with mortgages, but with some discipline you can save, spend and enjoy. It may not come straight away but with patience you can do it.
what about bills? electricity, gas, school fees? Does that all come under the 5% for mobile broadband?
Really liked this method. Worked on my husband who, as he says “hates when the budget goes into detail”. Agree with the comments above though: 60/20/20 is not workable for a family with children (or anybody with financial dependents for that matter). We did a spreadsheet of all our basic expenses (food, utilities, mortgage, insurance, childcare) and 60 wouldn’t cut it. We have no private school fees and have a $370,000 mortgage for a very modest fibro home. I think the formula needs to have a “loading” for dependents. We found 75/12.5/12.5 workable though.
Thats so funny Scott. I am totally the hummus toting day old bread person you refer to.
I’ve struggled to use complicated spreadsheets to manage my spending, yet I’ve been always broke 1 week before my monthly wage. You’re suggestion of 60-20-20 makes so much sense to me….And sounds so practical to have envelopes for splurging money. Cheers
Scott, how do I manage the above on the aged pension,with a little savings.Thanks Gale.
Re: Pensioners with little savings. Try banks with high interest bearing accounts (allows easy access in a hurry). Online a/c’s are usually the best for rates and some are better than Term Deposit Rates – Try Members Equity Bank or compare banks online. If you have a spare $1K open a high interest-bearing Term Deposit. Your principal is fairly safe in the above options. If Interest rates come down any further then fixed interest investment such as Aussie Bonds will likely be a better option. Baby-steps while you grow your money with compound interest (providing you keep saving and not spending your principal and interest). Frugal spending is the key and count every $ you save and deliberately put it aside to invest. Hope this helps.
we were one of the unlucky ones who were caught up in the R.H.G ”gobble up ” as RAMS folded and westpac brought all their customers and created a little stinging pot called R.H.G , where they put all RAMS VICTIMS, so it leaves us stuck in the closed book , exit fees very high and paying a very high interest rate ,we would love to keep our house but need to pay less monthly , has anyone else experienced this and is there any way out !! its hell !!
@Kat. Yep, we experienced it. In 2009 when rates were falling ours were going up. They got to around 10%, I made the call to refinance with NAB on their basic home loan and suck up the fees. I am glad we did because our rate is considerably lower. It’s robbery!
Great advise and actually makes a lot of sense
63yrs old,on a disability pension $868 mth,rent $888 mth,credit cards $15000.
Any light at the end of the tunnel?
Hi, I have to disagree with Scott’s 60-20-20 on the basis that the 60% does not include other vital living expenses like private health, car & house insurances, hairdressser – to name but a few. It is impossible for me (and my dependent mentally ill spouse with no income or pension) to live by the 60-20-20 plan, we do not have the 20% for indulging a meal out, the theatre, or nicities, etc, however, I do try to save the 20% for a rainy day.