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What is a 60-20-20 Savings Plan?

Money Mastery teaches its clients the  importance of spending money properly and savings is just another way that you “spend” that must be done properly. I like to point out to my clients that there is no such thing as savings. What does this mean exactly?  Well, ask yourself this question:  You save money for what?  The minute you answer the “FOR WHAT,” part you have spent your money.  It is still in the bank so you call it savings, but isn’t it already tagged, ear-marked, set aside for spending on something? Yes, so that’s why there is no such thing as savings.  So as Money Mastery Principle 3 states: Savings Is Actually “Delayed Spending.”

So what kind of things do we need surplus money for in order to take care of this “delayed spending?”

  1. Emergencies
  2. Emotional spending
  3. Retirement

Emergency Savings

We all have emergencies; they come along once in a while and surprise shutterstock_224050600each of us.  For example, suppose your car transmission breaks, or your hot-water heater leaks, or you have an illness that keeps you from work for a month.  All these are common things that happen all the time.  Look at your associates and see how much this is happening all around you. It’s only a matter of time before some kind of an emergency hits you.

Emotional Needs

And what about impulse purchasing? Just like an emergency, this is bound to happen to you at some point, so why not be prepared for it just like you would an emergency? So many people end up in far more debt than they need to because they do not set aside money that is used purely for the purpose of fun. If you never spend money for the sheer emotional satisfaction of getting something you really want to buy, then responsibly managing your finances becomes a drudgery. It’s like a diet that never allows you to indulge in a cookie or some ice cream once in a while — you will end up feeling too restricted and therefore not stay on the diet. The same is true for emotional spending. We all need to purchase things for shutterstock_44998930 (800x600)ourselves or loved ones on impulse at times, so it’s best to simply be prepared for this when it happens by having money set aside expressly for this purpose. If you don’t, you will spend money earmarked for debt payments or to pay other bills and this causes big trouble down the line.


Of course everyone knows they need to be saving the most money to spend later in life when they have quit working or can no longer work due to health problems. The problem is so many people do not really know how to do this.

The Beauty of the 60-20-20 Savings Plan

The 60-20-20 plan calls for all surplus money to go into these three areas for future spending:

  • 60% for long-term retirement
  • 20% for fun activities that build relationships and ensure you stay on track financially
  •  20% for emergencies.

When a person has money set aside for fun, retirement, and emergencies and an emergency hits then “what is the emergency?”  There isn’t one. And what about when an impulse purchase takes you over momentarily? No problem — you already have money set aside for this specific fun thing so you can spend guilt-free !

How much should you spend into these future accounts?  You should be saving at least 10 percent of your gross income every month for retirement. As for emotional savings, put enough away so that you have money to look forward to a wonderful activity or splurge purchase at least four times a year. In my experience, if you are not having fun very often, life becomes a real drag. As for emergencies, I suggest you review your income and if it is steady and you’ve had no interruptions in pay for the last three years, then save three months of income and be sure it’s liquid, meaning you have it someplace you can get at easily without penalty.  However, if you are self-employed or commission-only, you will need at least six months of income in reserve just to manage properly.

Dream with me for a moment. Let’s suppose you had no consumer debt, with six months of income in the bank. You would not have to be worried at all.  Take this challenge and calculate how much money it will take to get six months income reserved with no consumer debt, then estimate  how many months it will take you to reach this goal. If you want some really easy tools for doing this, I suggest you go here for a low-cost online tool that will help you calculate this quickly and easily.

Where should you keep this money?  This is a big question in terms of retirement money, and I have lots of opinions about that, some of which you can review by reading the following blog posts.  

Here’s How to Plan a Great Retirement

Over the Long Haul the Stock Market Always Goes Up, Right?

Successful Retirement Means You Will Need 8 to 10 Times Your Annual Income

How to Check to See How Good Your Retirement Plan Will Be

Kids’ Snacks and Your Retirement

The Coming Healthcare Crisis for Retirees and What You can Do to Protect Your Retirement Against It

Why You Will Pay More in Taxes at Retirement with a 401(k)

Stop Saving Money Into a 401(k)

Retirement can be funded in so many better ways other than just dumping it into a 401(k) that are so much safer and more predictable that I urge you to contact me for a no-cost conversation: peter@moneymastery.com. These include real estate, life insurance, annuities, and so forth.  As for emergency and emotional savings, I would keep these funds in the form of cash at home in a safe place, in a safety deposit box, or in a savings account that has a debit card attached to it so you can take care of emergencies when they happen.

How to determine if it truly is an emergency?  If it is totally unexpected, it is probably an emergency.  If the need is urgent, like that it needs to be solved today or at the latest in two to three days, it is probably an emergency.  If you cannot move forward without getting the problem resolved, it is definitely an emergency.  Don’t be afraid of using this emergency money, for this is why you have it.  Just know that 80 percent of all people will have an emergency during this year.  For your peace of mind, you must plan for this happening and relax and know you don’t have to worry.  Go to www.moneymastery.com for more help.   

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