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
20%: Savings and Paying down debt
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 50 30 20 rule of money? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
How to make a budget work Ramsey answers? ›
How to Make a Budget in 5 Steps
- Step 1: List Your Income. ...
- Step 2: List Your Expenses. ...
- Step 3: Subtract Expenses From Income. ...
- Step 4: Track Your Transactions (All Month Long) ...
- Step 5: Make a New Budget Before the Month Begins.
The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.
What is the 80-20 rule in simple terms? ›
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 for dummies? ›
This rule suggests that 80% of effects come from 20% of causes. For example, 80% of a company's revenue may come from 20% of its customers, or 80% of a person's productivity may come from 20% of their work. This principle can be applied to many areas, including productivity for small business owners.
What is the 40 40 20 budget? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
What is the best budget ratio? ›
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. The savings category also includes money you will need to realize your future goals.
What is the 20 10 rule money? ›
The 20/10 rule of thumb is a budgeting technique that can be an effective way to keep your debt under control. It says your total debt shouldn't equal more than 20% of your annual income, and that your monthly debt payments shouldn't be more than 10% of your monthly income.
The 50/30/20 Rule
This rule recommends that you spend 50% of your post-tax income on necessities (housing, food, utilities, transportation, insurance, childcare); and 30% on wants (travel, gym memberships, cable, dining out, etc.).
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? ›
Failure to Adjust the Budget: A static budget may become outdated as your financial situation evolves. Life events such as job changes, salary increases, or unexpected expenses can impact your financial landscape. Regularly review and adjust your budget to reflect changes in income, expenses, and financial goals.
Is the 50/30/20 rule outdated? ›
But amid ongoing inflation, the 50/30/20 method no longer feels feasible for families who say they're struggling to make ends meet. Financial experts agree — and some say it may be time to adjust the percentages accordingly, to 60/30/10.
Is $4000 a good savings? ›
Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
When should you not use the 50 30 20 rule? ›
The 50/30/20 has worked for some people — especially in past years when the cost of living was lower — but it's especially unfeasible for low-income Americans and people who live in expensive cities like San Francisco or New York. There, it's next to impossible to find a rent or mortgage at half your take-home salary.
What is an example of the 80 20 budget? ›
For example, if you earn $100,000 per year and pay roughly 20% in taxes (federal & state income and payroll taxes) you have $80,000 left to budget with. Using the 80/20 rule, you would send $16,000 to savings and have $64,000 remaining for expenses.
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 with suitable example? ›
To set goals with the 80-20 rule, you primarily establish that 20% of your efforts/tasks will result in 80% of your results. For example, at work, 20% of the effort you put into your job will result in 80% of your tasks being completed/successful.
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.
