Less expense tracking. More saving.
Do you feel like budgeting isn’t for you? Well, maybe you just haven’t found the right fit.
However, there’s an easy financial plan that prioritizes saving without the hassle of spreadsheets, notebooks, and tracking apps. Save first, spend later. That’s it.
It’s called the 80/20 budget.
The 80/20 budget divides your income into two expense categories based on percentages: savings and everything else. No more expense categories. No more tracking dollars and cents. Prioritize saving, then spend the rest however you like.
What is the 80/20 budget?
The 80/20 budget is a financial plan that helps people manage their money while prioritizing saving. It is a simplified version of the 50/30/20 budget.
The rule requires that you divide after-tax income into two categories: savings and everything else. As long as 20% of your income is used to pay yourself first, you’re free to spend the remaining 80% on needs and wants. That’s it; no expense categories, no tracking your individual dollars.
How does the 80/20 budget work?
The rule is simple — divide your after-tax income and allocate it as follows:
- 20% on savings
- 80% on everything else
20% savings
The one and only rule of the 80/20 budget is to prioritize saving. At least 20% of your income must go toward savings, everything else is negotiable.
Savings include an emergency fund, retirement savings, and other financial goals. Protect your financial health in the short-term with an emergency fund to guard against unexpected costs. Secure your financial health in the long-term by building up your retirement account (either a 401(k) or an IRA) and investments.
If you can't meet your savings goals, it’s time to trim expenses elsewhere. Look at your needs and wants, and cut spending where it makes sense. It’s typically easiest to reduce wants first — overspending on nonessentials — but don’t overlook needs. These expenses tend to be the more expensive budget busters, like rent or a mortgage.
80% everything else
The 80/20 budget allocates 80% of your income to everything beyond savings. It’s not necessary to differentiate between needs and wants. They both fall into the same bucket in this financial plan. Once you cover your savings goal each month, you’re free to spend the rest of your money however you like.
Needs
“Needs” include essentials like shelter, transportation, food, and health. More specifically, needs refer to things like rent or mortgage, utilities, gas, groceries, health insurance, and minimum debt payments.
Wants
“Wants” are nonessential but make life more enjoyable. They include dining out, attending concerts, movies, vacations, the latest electronics, and luxury items. Think of wants as the add-ons you excluded from the needs bucket. A want is a fancy steak dinner instead of groceries. It’s updating your cable package to include the highest internet speed and all the channels.
Is the 80/20 budget a good fit?
The 80/20 rule budget is one of the easiest financial plans because it has one golden rule: Save above everything else. This makes it simple and flexible. Consider it the stripped-down version of the 50/30/20 budget.
Here are other pros and cons of the 80/20 budget.
Pros
- Simple: No more expense tracking, since your only priority is saving.
- Flexible: You’re free to spend your money however you like on needs and wants, as long as you meet your savings goals.
Cons
- Lack of structure: This isn’t a comprehensive financial plan that tracks your money down to the dollar. If you need more structure, try the 50/30/20 budget.
Bottom line
The 80/20 budget is a financial plan that prioritizes savings above all else. It’s a smart choice to start paying yourself first, but make sure you have control of your spending.
FAQs
The rule requires that you divide after-tax income into two categories: savings and everything else. As long as 20% of your income is used to pay yourself first, you're free to spend the remaining 80% on needs and wants. That's it; no expense categories, no tracking your individual dollars.
What is the 80/20 rule in budgeting? ›
YOUR BUDGET
The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments. Of course, the 80/20 budget rule won't work for everyone.
What is the 80 20 rule for paycheck? ›
The 80/20 rule breaks out putting 20% of your income toward savings (paying yourself) and 80% toward everything else. Once you've adjusted to that 20% or a number you're comfortable with saving, set up automatic payments to ensure you stick to it.
What is the 50 30 20 rule of money? ›
Key Points. The 50-30-20 rule is a simple guideline (not a hard-and-fast rule) for building a budget. The plan allocates 50% of your income to necessities, 30% toward entertainment and “fun,” and 20% toward savings and debt reduction.
What is the best explanation of the 80-20 rule? ›
The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. In other words, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which initiatives to prioritize so you can make the most impact.
What is the 80-20 rule real examples? ›
80% of crimes are committed by 20% of criminals. 80% of sales are from 20% of clients. 80% of project value is achieved with the first 20% of effort. 80% of your knowledge is used 20% of the time.
What is the 80-20 rule everywhere? ›
There is a phenomenon that occurs in workplaces everywhere, known as the 80/20 rule, or the Pareto Principle, which suggests that roughly 20% of the workforce is responsible for accomplishing 80% of the work. This concept has intrigued researchers and managers alike, leading to a deeper exploration of its implications.
What is the 80-20 principle of money? ›
The 80/20 rule says that you should first set aside 20% of your net income for saving and paying down debt. Then split up the additional 80% between needs and wants. When using the 80/20 rule, calculate the amounts based on your net income - everything leftover after you pay taxes.
What is the new 80-20 rule? ›
Under the 80/20 rule, employers lose the tip credit for the time spent performing non-tipped side work if an employee spent more than 20% of their time performing tasks like rolling silverware into napkins, cleaning and setting tables, and making coffee.
What are the four walls? ›
In a series of tweets, Ramsey suggested budgeting for food, utilities, shelter and transportation — in that specific order. “I call these budget categories the 'Four Walls. ' Focus on taking care of these FIRST, and in this specific order… especially if you're going through a tough financial season,” the tweet read.
"Pay yourself first" is a personal finance strategy of increased and consistent savings and investment while also promoting frugality. The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.
What is a good savings rate? ›
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
What is the 60 20 20 rule for debt? ›
If you have a large amount of debt that you need to pay off, you can modify your percentage-based budget and follow the 60/20/20 rule. Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
What are 6 common budget mistakes you can t afford to make? ›
Neglecting Long-Term Goals: Focusing solely on short-term financial goals while neglecting long-term objectives is a common mistake. Whether it's saving for retirement, a home, or education, incorporating long-term goals into your budget is essential for building financial security.
What is the number one rule of budgeting? ›
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is the 80-20 rule for costs? ›
So, how can we use the 80/20 rule (Pareto Principle) in our Supply Chain? When using this principle to analyze business costs, most likely you will see that 20 percent of your cost categories are adding to 80 percent of your costs. If you can determine what's in that 20 percent, you know what to target.
What is the 80-20 investment strategy? ›
You have a high risk appetite and can tolerate market fluctuations. You can apply the 80-20 rule by investing 80% of your portfolio in equity mutual funds that have a track record of delivering high returns, and 20% in debt mutual funds that can provide stability and income.
What is the most productive way to apply the 80-20 rule? ›
Prioritize the first 20% of your workday regarding the tasks you complete and know when it's time to pivot and make changes when working on the remaining 80% to ensure you don't waste too much productive time and energy.
What is the 80-20 principle summary? ›
Most motorists drive carefully, while a small minority is careless and causes the majority of accidents. This phenomenon is better known as the 80/20 principle: roughly 80 percent of work results – or output – are produced by 20 percent of the work effort, or input.
