iSavta | 23.01.2022

Does budgeting feel too much of a burden for you?

But did you even consider that maybe, you just haven’t discovered the best form of budgeting for you?

The good news is that there is an easy and simple financial rule out there that makes saving the priority with no need to deal with those tedious tracking apps, notebooks, and spreadsheets. This is none other than the 80/20 income rule.

 

What is the 80/20 Income Rule? 

The 80/20 income rule is the financial plan for managing money and prioritizing saving at the same time. This is basically the simplified form of the 50/30/20 budget.

This rule requires you to divide your income after tax into two main categories – savings and others. As long as you set aside 20% of your income for paying yourself first, you are free to spend the leftover 80% on your wants and needs. It’s that simple. There are no categories of expenses and no need to track your individual dollars.

 

How the 80/20 Income Rule Works

This rule is quite simple. You just need to divide your income and allot it as follows:

• 80% on everything else
• 20% on savings

There is only a single rule here and that is to prioritize saving. A minimum of 20% of your after-tax income should be set aside for savings and the rest is negotiable.

Your savings can include retirement savings, an emergency fund, and other financial objectives. An emergency fund can be used for protecting your short-term financial health and guarding against unforeseen costs. For securing your long-term financial health, you can build up your investments and retirement account.

If you find it hard to meet your goals for savings, it might be time for you to cut back your expenses elsewhere. Check your wants and need and trim spending where it is sensible. It is often easiest to lessen your wants first, such as overspending on nonessentials, without overlooking your needs. Such expenses have the tendency to be pricier budget-busters like mortgages or rent.

The 80/20 income rule will set aside 80% of your after-tax income for everything else beyond savings. There is no need for you to differentiate between wants and needs. Both of them belong to one category in this financial plan.

After you have covered your monthly savings goal, you have the freedom to spend your remaining money no matter how you like.

 

Differentiating Needs and Wants

Needs refer to essentials such as food, transportation, health, and shelter. To be more specific, it may look like paying mortgage or rent, gas, utilities, health insurance, minimum debt payments, and groceries.

Wants, on the other hand, are nonessentials but they make your life much more enjoyable. It may include things such as going to concerts, dining out, luxury items, the latest models of electronics, watching movies, or vacations.

You can think of these wants as add-ons that are not part of your needs bucket. A fancy steak dinner is a want rather than groceries. It is switching to a cable package with all channels and the fastest internet speed from a traditional cable package.

 

Are you ready to beef up your savings? Follow the 80/20 income rule.