The 60/40 Budgeting Principle.

Have you ever worked hard to set aside savings only to be devastated when the savings must go towards fixing your house or car? Most budgeting techniques encourage you to set aside a specific amount for retirement, fun, savings, necessities, and bills. In a budget like this you are missing one key element; the unexpected.

Preparation for the future and retirement is important in a budget. Paying your bills, buying the necessities, and some fun money is also very important. But emergency funds and vacation money is just as important as these other areas. If money is not allocated for these areas you can risk breaking your budget.

There are six main categories every budget should include. A budget should have a category for bills, necessities, retirement, long term savings, short term savings, and discretionary spending. When you create your budget each category should list all the transactions you have that fall under that category.

Bills are expenses in your budget like cable, internet, phone provider, housing, car loan, student loan, medical bills, insurance, etc. Necessities would be expenses in your budget like groceries and gasoline which are not always the same exact amount each month. Long term savings is money set aside for emergencies like job loss or major catastrophes. Short term savings is money set aside for vacations, repairs on your car or house, credit card debt reduction, and holiday gifts. Discretionary spending is the money you set aside in your budget to buy optional items that are not necessary. Items like a new shirt or an MP3 player.

Few people have any idea how to manage all these categories of budgeting. You feel daunted by even trying to figure out how much to allocate to each category. Recently Richard Jenkins wrote an article for MSN Money laying out an excellent plan for how much of your income should be set towards each category.

Jenkins proposed that sixty percent of your gross income should go towards bills and necessities. Your bills and necessities should not exceed sixty percent of your income. If your bills do exceed sixty percent, it may be wise to reduce the total debt on some of those liabilities.

The other forty percent of your income should go towards the other categories. Ten percent of your income should be reserved for retirement. Another ten percent should be set aside for long term savings. Ten percent should be reserved for short term savings. The final ten percent should be allotted to your discretionary spending budget.

If these estimates are not possible for you, the percentages can be adjusted. Your budget may look more like eighty percent on bills and necessities with the remaining twenty percent being divided equally among the last four categories. For example; five percent for retirement, five percent for long term savings, five percent for short term savings, and five percent for spending money. Either way some money needs to be set aside proportionately in your budget for each of the four non-bill categories.

The 60/40 budgeting principle provides an excellent ballpark of how you should budget your money. Following this concept can provide you with an excellent cushion no matter when or what the crises may be. Budgeting should always contend to solve every possible contingency as the 60/40 budgeting principle does.