60 - This is 60% of your NET income (paycheck = money after taxes) that you can actually spend on living expenses. Housing, Food, Transportation, Insurance, Entertainment must all be covered by this 60%!
20 - This 20% represents your Savings/Investing priority. When you are young or just beginning your budgeting process, this 20% is marked as Savings. However, once your savings goals are achieved this will become the amount you are Investing. Moving this amount from Savings to Investing needs to be done as quickly as possible.
10 - This 10% is opposite of the above 20%. Meaning, that while your first priority is to Save at a rate of 20% of your income, you will be simultaneously Investing 10%. Once your 20% Savings goals are realized you will then add this 10% to the 20% for a total of 30% into Investing.
10 - This other 10% is for charitable contributions as you see fit. This money is used to make the world a better place. You can spend this money on charities, churches, or to cover volunteer expenses. Once into retirement, your efforts to Save and Invest may then enable you to increase this amount well past 30% of your retirement "draw" to help those around you.
Some GREAT Savings Goals.
As mentioned above you will save 20% until your savings goals are achieved. So, what are some Savings goals?
- $1,000 Emergency Fund. This is your problem solving money. Car and home repairs. This is your fist line of defense for your finances.
- 3 Months worth of Expenses (not your usual Net income but your usual monthly expenses. In a serious emergency you should be able to find ways to stretch this money to 4 or even 5 months)
- 4-6 Months additional worth of Expenses based on job security. Once your initial 3 months savings goal has been reached you may want to consider expanding this to six months. This decision would be made by considering how likely you are to loose your job and how long it would take you to replace that income. If you are self-employed I would highly recommend having six months of income. If you are in the IT industry I recommend it because, while finding a new job may not take much time, it may require relocation costs. If you are a elementary school teacher with more than three years teaching then I would not recommend extending beyond 3 months.
- Periodically you may want to drop from 30% Investing back to 20% Savings and bulk up your Emergency fund or your 3-6 months Expenses as your standard of living increases and the amount you need to sustain your expenses increases.
So, how did the 60/20/10/10 rule save my vacation? Two days before traveling to Yellowstone this summer with my young family I received a recall notice concerning the power steering of my car. With no time to schedule the repair we ventured off on our family adventure. Just outside of Pocatello Idaho the power steering failed. I called the local dealership and took the car in. Within the hour they determined that the car "could" be driven, but a part needed to be replaced in order to fix the problem. Without that savings our trip would have been over shortly after it started (I would not chance completing a driving trip through Yellowstone with a young family on "iffy" power steering.)
Instead, I called a few car rental places and found a suitable replacement (in truth, an upgrade) for the car and continued the trip. While the car rental basically equaled the cost of the deposits we would have lost if we canceled the trip, it did allow us to enjoy Yellowstone in a more comfortable vehicle and we were able to create great family memories.
Of course the aftermath of dipping into the Emergency Fund is that I have now switched my 20/10 cycle away from 30% investing back to 20% Savings until the Emergency Fund is back up to $1,000 which will only take a couple of months. Then I will switch back to 30% Investing.
I was so grateful that I had access to my $1,000 emergency fund. It kept my family safe and provided a way for us to continue with our trip and get back home without adding much additional stress to the break-down.
