How to Use the 80/20 Budget

80 20 budget

When it comes to life in 2022, simplicity is hard to come by. I am not personally aware of any budgeting method that is easier to use than the 80/20 budget. I am going to share everything that you need to know about it here!

80 20 budget

The 20

The 20 here is the most important piece of this entire budgeting method. The 20 is what you pay yourself. First. If you save (invest) 20% of your income before doing anything else, you will find yourself in a great place!

Let’s do some quick math. If you make $50,000 / year and invest 20% of it, working for 40 years and assuming an 8% return per year on average, your investments would total up to just over $2.5 million at the end of that 40 year period.

The crazy part? You didn’t have to add up receipts, comb through your spending, or nickle and dime anything with this budgeting method!

All you did was save 20% of your $50,000 / year income.

Never even got a raise in your whole 40 year career.

$2.5 million dollars.

I do want to recognize that it isn’t possible for everyone to save 20% of their income. That is why I personally feel that this is actually a somewhat advanced method of budgeting, though it is often marketed as a beginner method. More detailed budgeting methods can allow you to find where you’re spending too much and help you efficiently adjust things to try and get closer to that 20% surplus mark.

If you’re a beginner, check out this article on budgeting for beginners!

I think it is also important to make a quick note here about what I mean when I say save (invest). Savings will not bring you wealth. Investing will. One of the first steps is to build an emergency fund, which I believe in doing with a savings account. From that point on, however, investing is the way in my opinion. If the example above isn’t enough, I don’t know what is.

budgeting methods

The 80

Simply put, the 80 is everything else. That is the beauty of this extremely simple method of budgeting. Save (invest) that first 20%(+), do whatever with the rest.

Does that sound like something a Twitter finance guru would say? Probably not, though they do tend to have some interesting takes.

Again, this budgeting method is not for beginners in my opinion, what happens with that 80% is almost the exclusive factor in controlling your quality of life. The little things do matter, making that 80% cover all of your required and non-essential expenses is no easy task.

Once you are comfortable with your situation and understand how to spend with intention, this budgeting method is excellent for keeping things on track with little to no effort.

It may go without saying, but if you are not comfortable with spending the 80% completely blind to where it all goes, I would like to suggest that you prioritize the required expenses. Things like housing, food, and bills come to mind.

The overall thought process with this method – and the reason I love it so much – is that paying yourself first will set you up for so much success. It is absolutely the most important thing you can do if you are looking to achieve financial independence.

Pros of the 80 /20 Method:

  • Arguably the most simple budget of all time
  • Requires minimal math
  • Paying yourself first
  • Minimal time commitment

Cons of the 80 /20 Method:

  • Often suggested as a beginner method
    • Recklessly spending the 80 can put you in a bad place
  • Can result in financial gaps
  • Keeps you from being aware of your full financial picture

If the 80 / 20 ratio (or 20 / 80) sounds familiar to you, it is likely that you have heard of the Pareto Principle. 20% of ___ results in 80% of ___ (Mr. Pareto discovered that 20% of Italians in the late 1800’s owned 80% of the land, then a fellow named Joseph applied it to quality control a few decades later and it became popular). I believe that it’s actually extremely relevant in almost all walks of life and you can read about it here.

In Summary

As stated above, I do not feel that this is a beginner method of budgeting. Understanding where your money comes and goes takes time and effort. Once you have a strong grip on your finances, this is an extremely simple hands-off method to keep yourself aligned with your goals!

If you’re looking for a method with slightly more specific guardrails, the 50/30/20 budgeting method is a great one! I wrote all about it here!

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Thank you so much for taking the time to read this! I’ve written dozens of articles on a variety of financial topics and would love it if you checked them out!

Please do not hesitate to reach out with any questions, comments, or suggestions!

My contact information can be found here.

– RCG

 

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