Rule of 80 20? Do you mean the Pareto principle?
No, I did not mean that. But the Rule of 80-20 is a spin-off version of the 50/30/20 rule.
If you ever have trouble with the 50/30/20 rule or you are looking more simplified version of budgeting, Then the rule of 80-20 budget is a must a try!
In this article, we are going to discuss why this rule of 80-20 could help you stash cash automatically. Let’s start!
What is the rule of 80 20?
The 80/20 finance rule is the simplest way to budget where you take 20% of your income into savings as soon as you receive your pay. In other words, it adheres to ” Pay yourself first” and then spend the rest of the 80% paycheck on other items.
Since this rule adopts the “Pay yourself first” strategy. It helps you to quickly build your emergency savings or contribute towards your retirement savings without much tracking or hassle.
If you ever had trouble budgeting with the 50/30/20 rule or find it hard to differentiate between your “wants and needs”. Then the rule of 80 20 is a great alternative for your budget plan.
Where does the rule of 80 20 come from?
The 80/20 plan is a spinoff of the 50/30/20 plan. The 50/30/20 rule was proposed by Sen. Elizabeth Warren (then a Harvard law professor) and her daughter, Amelia Warren Tyagi.
The rule states that 50% of that take-home income should go toward necessities like housing, electricity, gasoline, groceries, and utility bill.
Further 30% can go to your wants like restaurant dining, travel, shopping, or getting tickets to a sports game.
Finally, 20% should go toward savings or debt repayment.
How to calculate 80/20 rule?
For example, if your monthly take home is $2000 (post-tax income). Then multiply your income X 0.20 = Savings ( This amount goes into your traditional savings account or retirement account)
In case of a $2000 monthly income, $400 would be your savings. Then the rest $1600 goes to your monthly spending.
Examples of the 80/20 rule?
The rule of 80 20 is known for its simplicity. By paying yourself first, and also by automating your savings you are building a habit of saving first before spending.
Even if the amount could be small, but this habit can set up for winning in the long run.
By saving $400 a month, you can stack up to $4800/ year. This amount can act as a cushion in times of emergency.
Once you built the savings for emergency expenses, now you can focus on moving your 20% savings to the retirement account to build your nest egg.
How 80/20 financial rule helps?
It’s a minimalist budget and prioritize savings over spending. Some of the ways how the rule of 80 20 helps:
You pay yourself first:
It’s too easier to spend up all of your hard-earned cash than save. By using the 80/20 plan, you pay yourself first!
This act ensures that you are prioritizing your savings and helps you save every month on month.
You will save 20% of your income first and then use the rest for living expenses, bills, and your wants.
It is easy to stick with a simple plan than a complicated budget plan.
To create an 80/20 budget plan, you might need less than a minute to make one.
It’s simple, basic, and excellent way to start budgeting.
Automate your savings makes easier:
With the 80/20 budget, it’s easier to automate your savings.
Because you know beforehand, how much of your income should be going into your savings account.
So you can set up a direct or automatic transfer on payday to transfer your money automatically into your savings accounts.
The 80/20 budget plan is a great starting point, but it should be taken as something minimum you should save.
The more you can save, the better your retirement life will be.
Thank you for reading!