The 80/20 Budget Rule for Those Who Don’t Like Tracking Expenses
What is the 80/20 Rule?
The 80/20 Rule is a simple budgeting approach. It relies on your after-tax income and health insurance expenses, as well as any other expenses deducted from your salary. You put 20% of your after-tax income into savings. The remaining 80% goes towards covering your expenses.
Where Did the 80/20 Rule Come From?
The 80/20 Rule is a simplified version of the 50/30/20 Rule. This budgeting strategy was proposed by Senator Elizabeth Warren (who was a law professor at Harvard University at the time) and her daughter Amelia Warren Tyagi.
How to Use the 80/20 Rule
The 80/20 Rule is designed for simplicity. To use it, multiply your after-tax income by 0.2. The result is the amount you should put into savings. For example, if your after-tax income is $800, you should put $160 into savings right when you receive your paycheck. This leaves you with $640 for your expenses, including needs and wants.
Why the 80/20 Rule Generally Works
The 80/20 Rule generally works because it is easy to apply and maintain. It may be suitable if you are new to budgeting and don’t want to adopt something complicated. It might also be suitable if you find it difficult to stick to a more organized budget or find it stressful. This budget has a lot of flexibility, so if you find your spending patterns variable, the 80/20 Rule may also work well for you.
80/20 Rule vs. 50/30/20 Rule
The 50/30/20 Rule is considered good advice, but it can be challenging to distinguish between what is a want and what is a need. For example, there are certain clothing items that you need. You may need specific clothes for work and require basic pieces to wear daily. Some clothing items are also wants, like trendy items that you will only wear a few times. Everyone will determine these things differently.
Even if you know that ice cream is a “want” and other foods are “needs,” it still takes time to go through your grocery receipt and separate costs based on items. Some people may not want to classify and track their spending to the extent that the 50/30/20 Rule requires.
The 80/20 budget plan is simply a simplified version of the 50/30/20 plan. You don’t need to track any expenses, nor do you need to distinguish between “wants” and “needs.” Simply, take savings off the top and spend the rest. Some may find that the 80/20 Rule leaves a lot of room for discretionary spending. If you prefer organization, the 50/30/20 Rule may suit you better.
Take It With Caution
The 80/20 budget plan is a great starting point, but you should view it as the minimum you should save. The more you are able to save, the better. Once you achieve the 80/20 ratio, push yourself towards a 70/30 savings rate, then 60/40.
As your savings increase, so does your flexibility and opportunities. Not all savings have to be in a retirement account. You can put that money into more easily accessible accounts, so it can be used to purchase rental property, start a small business, pursue a career adventure, or enjoy additional vacations.
You should remember that the 80/20 Rule is a general guideline. Your results will vary, and you may have financial priorities that do not fit this guidance. Like all general rules, it is a starting point, and you can adjust it to meet your individual needs.
Source: https://www.thebalancemoney.com/dont-like-tracking-expenses-try-the-80-20-budget-453602
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