Saturday, April 7, 2007

Reducing Debt While Increasing Savings using the 60/40 Principle

Most folks think that it is nigh impossible to pay off their credit card debt while saving money. They try to put all their extra cash to debt only to get themselves deeper in debt because they have no money in savings to pay out when an emergency occurs. This is a vicious cycle that most of us are familiar with and don't see a way out.

Take heart. There is a simple system that will allow you to pay off debt while at the same time increase your savings account balance. It is called the 60/40 Principle. It is the system that I used to get my family out of debt and eventually we moved from being middle class to millionaires over a 7 year period. Here are the basics:

This concept is the main rule that governs the flow of money in our lives. If you implement the 60 / 40 principle on any money you receive, you will immediately see your savings account start growing while your debt load decreases. If your debts are great, start only with money that is not part of your income, such as birthday money, rebates, unexpected cash from part-time employment, your change jar, your bonus from work, a tax refund check, whatever; you get the idea. You allocate money in this way by the 60 / 40 principle:

  1. 60% you live on. This goes into your main checking account.
  2. 10% goes into a long-term savings vehicle (IRA, 401k, Keogh account, solo 401k) for retirement. If you don't currently have a retirement account of any kind open two savings accounts at your bank. (One for long term and one for short term savings)
  3. 10% goes into a short-term savings account (local bank or a money market account) for use in those occasional large-scale expenses (new tires) and emergencies (the water heater explodes).
  4. 10% is tithed to a church or secular charity that is in line with your purpose. This is your ''rent'' for occupying space on the planet.
  5. 10% is pure philanthropy. That's right, you just give it away for the benefit of the community at large. This primes the pump so that the Universe starts sending wealth your way.

Once you have retired your debts, you apply the 60 / 40 principle to all your money, including your income, to keep money flowing in your life. Should you have any questions or comments please post them. I'll do my best to answer you quickly.

8 comments:

Liz said...

Janine, the blog looks awesome! People need to know about the 60/40 principle! I'll send it on to my friends. We are all seeing the results of 60/40.

Liz Quist

The Money Muse said...

Liz:

Thanks for your support and I'm thrilled that you are seeing results with the system. I know it works, but it PAYDAY to have folks tell me how well they are doing with it. I appreciate your feedback!

SpeakUp said...

I started following the 60/40 principle in 2004. Within a week I noticed a huge difference, in real dollars, but more importantly in my attitude towards money. I don't think anyone could convince me to give up my 60/40 habit! This one concept alone has totally altered my money attitude. The other concepts Janine teaches are incredible and life altering as well. I highly recommend her seminars, books, and CDs!
Ricky Hatch

The Money Muse said...

Ricky:

You are too kind, I'll pay you the $20 bucks later! Just kidding! The 60/40 principle is the one thing that keeps folks going along the path to financial indpendence. I wish it for everyone!

jennifer said...

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Verena B said...

Our family has been pretty hard hit by this economy. As stressful as it has been, it's probably been equally stressful trying to figure out which direction to go to pull us back into a 'producing income' mode.

I've been praying for how I, a home schooling mom, can help with the family finances. I resolved to again try the 60/40 principle with some income I made helping my sister last week. (I learned about it a few years ago.) No sooner had I even made the resolve than I felt directed and peaceful in which ways to pursue for producing income.

Now my struggle is trying to stay connected to that direction and peace so I don't get pulled into the craziness that just leaves me spinning my wheels.

I can't thank you enough for sharing this principle!!!

Charles Bromley said...

This is a great system to implement if you really want to save money. When people are not able to save money, the problem lies to the fact that they don't know where their money is going. With this type of system, you'll know exactly where your money is going and you will know that you are saving something. Save up and invest and have a happy retirement.