You may have been meaning to get on a budget but get overwhelmed on where to start or what budget method would work best for you. The idea of tracking all of your expenses may just seem too daunting of a task, to begin with. The 80/20 budget may be a better option for you because it makes it easier to track your expenses, and it can be a less overwhelming budget method to start with. It’s less time-consuming, easy to follow, and helps you save money quickly.
If you’re ready to stop living paycheck to paycheck and ready to take control of your finances, the 80/20 rule is a simple yet powerful budgeting method to get you on track.
What is the 80/20 rule?
The 80/20 rule is known as the Pareto Principle Rule. In the early 20th century, Pareto used the 80/20 rule to describe Italy’s distribution of wealth. Pareto used an illustration from his garden to explain this principle. He noticed that 80% of his peas were produced from 20% of his plants. He likened this theory to show 20% of Italy’s population owned 80% of the wealth.
The basis of the 80/20 rule is that the “majority of the results come from a minority of the inputs.” When it comes to applying the 80/20 rule to your finances, you pay yourself first. You will save 20% of your income and use 80% of your income for your living expenses, bills, and wants.
What is an 80/20 budget?
The 80/20 budget is actually a simplified version of the popular 50/30/20 budget. These budgeting methods are called percentage breakout methods because you break down your budget into percentages.
The 50/30/20 budget breaks down into three categories:
- 50% to needs
- 30% to wants
- 20% to savings
The 80/20 budget on the other hand is only two categories:
- 80% to needs & wants
- 20% to savings
So, rather than breaking down your needs and wants, they go into the 80% category. This budget is great for paying yourself first. You will save 20% of your income, and the rest goes to everything else. Of course, you want to use your 80% towards paying for your essentials first; then, you can see what’s leftover for spending.
Pros of using the 80/20 rule
The 80/20 budget is an excellent budgeting method to start with especially if you face budgeting challenges. It’s simple to use, and you prioritize your savings. It helps you create a habit of budgeting, and then you can increase your savings amount as you pay down debt or increase your income. A few more pros of using the 80/20 rule are:
You pay yourself first
It’s too easy to spend up all of your hard-earned cash. By using the 80/20 plan, you pay yourself first! This ensures that you are prioritizing your savings and helps you save enough money every month. You will save 20% of your income first and then use the rest for living expenses, bills, and your wants.
We live in a fast-paced, fully scheduled world. The 80/20 plan can hold you accountable to a budget without taking up a bunch of time. It’s simple, basic, and an excellent way to get started budgeting.
Automate your savings easier
With the 80/20 budget, it’s even easier to automate your savings. You already know how much of your income should be going into your savings account, so you can set up a direct deposit or automatic transfer on payday to transfer your money automatically into your savings accounts.
How to create an 80/20 budget
When making your budget, keep in mind it’s actually a form of self-care! Getting a grasp on your finances can reduce stress and anxiety and help you finally have financial freedom.
Creating an 80/20 budget can be pretty simple. However, it is still necessary to know your expenses and your income to set up a budget. You need to be sure you are bringing in enough income to cover your living expenses and allocate 20% to savings.
Layout your budget
You can use a notebook or a spreadsheet from Excel or Google Sheets to create your budget. Google Sheets and Excel have budget templates, which makes it super easy to create a budget.
Add in your income
When making your budget, first add up all of your monthly income, then make a list of all of your expenses for the month. Don’t forget to include all of your monthly expenses when making your budget. As sometimes it can be easy to forget certain expenses.
For example, let’s say your net monthly income equals $2500 (after taxes). You save 20% of your income, which is $500, and 80%, which is $2000, is dedicated to your living expenses, bills, and your “wants.” Rather than splitting your needs and wants like the 50/30/20 budget, they are all included in the 80% category. The 80/20 budget is super simple to follow and can set you up for financial success.
Create a budget calendar
When making your 80/20 budget, you can create it as a budget calendar to stay on top of your financial tasks. A budget calendar is a budget in calendar form where you input all of your bill due dates to ensure you pay on time.
Review your budget often
It’s best to revamp your budget every so often because your expenses and income may change. As you pay off debt, you can allocate more money to your savings if you have any. Your living expenses may increase or decrease along with your income. This is why you want to stay on top of your finances to ensure you are optimizing your savings and staying on track with your budget.
Who the 80/20 plan can benefit
The 80/20 plan is a great starting point for those that don’t like to meticulously track expenses. Its simplistic version of the 50/30/20 budget makes it less-time consuming, making it much easier to stick to. You don’t have to break down your needs from your wants because they all fall into the 80% category.
It gives you a simple formula to follow to set up a successful budget. This budget is beneficial for busy moms, couples, or even individuals. It’s ideal for small budgets or large budgets because it can help you to automate your savings and save money easier and faster.
The 80/20 budgeting method is perfect for anyone searching for a quick way to create a powerful budget in less time. The basic rule is 80% of your income goes to your needs and wants, and 20% of your income goes directly to your savings.
With the 80/20 budget, you pay yourself first, save time from tracking all expenses, and can automate your savings easier. By making a budget, you can save money, avoid late fees, and work towards getting out of debt. You can get started by creating your 80/20 budget with our free budgeting worksheets!
Take control of your money with the 80/20 rule and achieve the financial success you desire!