What Is The 80/20 Rule Budget? (With Examples)
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Some people feel overwhelmed just by the idea of starting a budget to save money for something they want. However, if you find tracking all your expenses complicated and tedious, the 80/20 rule budget may be a better option.
It’s a great way to get introduced to budgeting without feeling you have to spend hours figuring out your money. Instead, it’s simple and easy to implement.
The best thing about the 80/20 rule budget is that you don’t need any tracking apps, spreadsheets, or notebooks if you don’t want to. You only need to split 20% of your earnings and decide what you want to do with that money.
What Is The 80/20 Rule Budget?
Like any budget method, the 80/20 is based on percentages and focuses on two different categories:
- Savings – You will save 20% of your salary to build your savings, make debt repayments or invest the money.
- Expenses – You will spend the rest 80% of your money on any expenses you have during the month.
Read: Why Is Budgeting Important?
If you think about it, the 80/20 rule budget is basically identical to the 50/30/20. The only difference is that you don’t distinguish your wants from your needs, and everything is considered an expense, no matter if it’s an essential one or not.
Who Is The 80/20 Rule Budget Ideal For?
The 80/20 rule budget is excellent for those who want to pay themselves first since you transfer 20% of your earnings to your savings account and then use the other 80% to pay for any expenses.
Read: Budgeting For College Students
This budgeting method is ideal for people that never budgeted before and want to begin it. However, if you wish to save more money than spending or to pay huge amounts of debt, the 60/30/10 rule budget will be a better fit.
The 80/20 rule budget is excellent for you if you:
- Want to pay yourself first
- Want a flexible and straightforward budget method
- Start budgeting for the first time
- Don’t have a lot of time
The 80/20 plan is excellent for those who are very busy and don’t have much time to spend on a budget. It’s a simple formula to follow and set up a successful budget. Since it’s a simplistic version of the 50/30/20 rule budget, it’s less time-consuming, making it easier to follow and perhaps stick to until you decide to invest more time in a different budgeting method.
How To Budget Your Money With The 80/20 Rule Budget?
Even if it’s pretty straightforward how to budget your money with the 80/20 budgeting method, I will still explain more in-depth.
Spend 20% Of Your Money On Savings
When you receive your income, the first thing you do is allocate 20% of it into your savings account, repay debt, or invest the money in something you want. Most people will put the money in a savings account, but it’s up to you how you want to use the 20%.
Read: Most Common Budgeting Mistakes
A few examples of what is considered to be part of the savings category:
- Buying a House
- Emergency Fund
- Debt Repayments
- Real Estate Investments
- Starting a Business
- College Savings For Kids
- Retirement Contributions
- Stock Investments
- Sinking Funds
If your salary is $2,000 after-tax, that means you would allocate $400 to savings each month. In 12 months, you would have saved $4,800.
Spend 80% Of Your Money On Expenses
The most significant piece of your earnings, 80%, will be allocated to the expenses category, which englobes all the costs you have during the month. It doesn’t matter if those costs are something you can’t avoid because they are essential for you to live, or if it’s something you want but is not crucial for your living.
Read: Check the 60/40 Rule Budget
A few examples of what is considered to be part of the expenses category:
- Utility Bills (Water, Gas, Electricity)
- Any Loans
- Household Products
- Entertainment Subscriptions
- Dining Out
- Memberships (gyms, professional organizations)
If your salary is $2,000 after-tax, that means you would allocate $1,600 to your needs each month. In 12 months, you would have spent $19,200.
How Do You Set Up The 80/20 Rule Budget?
If you decide you want to move forward with the 80/20 rule budget, here’s how you can set one up.
1 – Calculate Your After-tax Income
So, the first thing you want is to calculate your after-tax income and understand how much money you will receive every month. Some people receive the same amount every month, but for others, it can vary, which makes budgeting a lot more complicated (but not impossible). If you are a freelancer, estimate how much money you expect for the next month. Some people get paid weekly and some biweekly, so you must adjust your budget according to your situation.
Read: Try The 30/30/30/10 Rule Budget
You can use the free tool on the IRS website to help you determine how much income you can expect to receive and how much taxes you will pay. However, if you have any questions, it would be better to speak with a tax professional.
2 – Use The 80/20 Template/Spreadsheet
Remember when I said the 80/20 rule budget doesn’t need a spreadsheet? You don’t unless you are budgeting with the 80/20 plan for the first time. First, you need to confirm that 80% of your earnings are enough for you to live.
You can use a spreadsheet that you print and use/fill online or an excel sheet. Whatever makes your life easier, it’s what you should use. Don’t forget your partner’s income and expenses, and check the best personal budget categories for you.
I love excel sheets, but some people like to have a printed spreadsheet where you can quickly look at all your expenses and how much cash you have allocated to each category. Learn how to make a budget in excel.
3 – Check Your Monthly Expenses
So now, you need to review your expenses and check how much money you are spending per month. A good thumbs-up rule is to check the last three months to ensure your costs don’t change a lot. For example, imagine checking December (holidays and gifts) or a month where you traveled a lot. Your expenses would be higher for that month, and you need to consider that.
Read: Check The Best Foods To Buy On A Budget
After you check all your expenses and ensure that they don’t overpass 80% of your income, the next time you receive your salary, you can transfer 20% of your income to a savings account, make investments, create an emergency fund or make additional debt payments.
4 – Set Up Your Financial Goals
Once you determine how much income you will receive, how much it’s allocated in each category, and all your expenses are organized, you need to set financial goals.
Read: Advantages And Disadvantages Of Budgeting
In my opinion, no budgeting is worthing if you don’t have the motivation to keep you moving forward and achieve what you purposed at the beginning of each month. You need to set some financial goals for each month, or even for an entire year or five years. I gave you some ideas above of what your objectives could be. Some examples are buying a house, paying an immense debt, or creating an emergency fund. You also need to know why you want to invest your money.
You didn’t set your financial goals initially because you didn’t know your income and expenses. Now you can set realistic financial goals because you know your monetary situation.
5 – Evaluate And Adjust Your Spending
Finally, you will need to evaluate and adjust your personal budget or family budget at two different moments. First, you will check your spreadsheet and see if you need to make any adjustments to ensure you respect the percentages of each category and don’t overspend. The second time you need to evaluate it’s at the end of each month and see what went right and wrong and make more adjustments.
Read: What Is Reverse Budgeting?
Every month you will need to evaluate and adjust your budget. Don’t get discouraged if you fail or it doesn’t go like you wanted because you will not get everything perfect on the first attempt. Even the more experienced budgeters like me still make mistakes after years of budgeting.
80/20 Rule Budget Examples
The average American earns approximately $51,480 gross per year in the USA, equivalent to $4,290 gross per month. So that’s the value I will use in my example.
Note: For your information, I have researched a lot about how much the average American pays for rent, bills, groceries, etc. However, it would help if you kept in mind that it varies significantly in each state. These examples are only for you to understand better how the 80/20 rule budget works.
The first example is for a single person who splits a house with someone that is not his partner and has no kids.
As you can see in the example, all the money is allocated according to the 80/20 percentages for both categories. You don’t need to be specific in this budgeting method. I only did it for you to understand how the 80/20 budgeting works and how you can check if you have enough money for all your expenses.
Read: How To Budget As A Couple?
If you’re budgeting your money and your partner’s salary as well, you can check the 80/20 rule budget example for two incomes. Remember that you merge the two salaries into one and use that amount to budget your money for the month.
It can be a massive challenge to budget money with someone else when you have children because that means keeping the entire family on the same financial page, which sometimes doesn’t happen. You may have to cut some expenses to ensure you can save 20% of your earnings every month.
80/20 Budget Template
To help you correctly implement the 80/20 rule budget, we have created the 80/20 Budget Templates Bundle. This bundle will help you start to budget your money the right way.
What is included in the 80/20 Budget Templates Bundle?
- 80/20 Printable PDF Template
- 80/20 Pre-Filled Printable PDF Template
- 80/20 Digital Fillable PDF With Pre-Built Formulas
- 80/20 Pre-Filled Digital Fillable PDF With Pre-Built Formulas
- 80/20 Excel Spreadsheet With Pre-Built Formulas
- Financial Goals Printable PDF Template
- Financial Goals Digital Fillable PDF
- PDF With Instructions
As you can see, Why Budgeting gives you different 80/20 budget template formats so you choose the most suitable according to your needs.
Is The 80/20 Rule Budget Good For You?
If you are looking for a budget where you don’t need to spend too much time with categories and want something where you can save a small amount of money and spend the rest, the 80/20 rule budget is perfect for you.
The 80/20 budget is a monetary plan that prioritizes savings above all the rest, so you may have to cut some expenses to save the 20% you need with this budgeting method.