What is the 80/20 rule savings?

The 80/20 budgeting method is a common budgeting approach. It involves saving 20% of your income and limiting your spending to 80% of your earnings. This technique allows you to put savings first, and it's both flexible and easy.

fool.com - 3 Reasons I Love the 80/20 Budgeting Method - The Motley Fool

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Is the 80/20 budgeting method right for you too?

Key points

The 80/20 budgeting method is a common budgeting approach.

It involves saving 20% of your income and limiting your spending to 80% of your earnings. This technique allows you to put savings first, and it's both flexible and easy. There are lots of different approaches to budgeting. My favorite, though, is something called the 80/20 budget. With the 80/20 budget, you keep your spending on essentials as well as frivolous expenses to 80% of your income and you save the remaining 20%. This has been the type of budget I've found most effective for me over the long term, and it's a great way to make a spending plan if you really don't enjoy the budgeting process. So, why do I love this approach so much? There are three key reasons.

1. It prioritizes savings

The main purpose of making a budget in the first place is to make sure you are saving plenty of money (and not going into credit card debt or otherwise living beyond your means). After all, when it comes down to it, it doesn't really matter if you spend a little more on housing and a little less on your car or vice versa -- as long as you're putting aside enough money to accomplish financial goals and build wealth. The 80/20 budget really focuses on this underlying purpose of budgeting and that's why it is so great. It puts saving money front and center. The only definite thing you need to do to stick to the 80/20 budget is to save money. So as long as you can follow the requirement to save 20% of your income, you'll have accomplished your most important financial objective.

2. It's simple

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Another big benefit of the 80/20 budget is its simplicity. There's no need to make a list of dozens of different things you spend money on each month when you make this type of budget. And there's no need to try to decide in advance if you're going to spend more on entertainment and less on dining out or clothing or vice versa. As long as you're prioritizing saving first as the budget calls for, and you don't find yourself spending too much and going into debt, you can be financially successful with this budget without a lot of hassle.

3. It's flexible

Flexibility is another huge benefit of an 80/20 budget. If you have a budget where you have set specific spending limits for every different type of expenditure, then you can find yourself in trouble when things don't go as planned. If you budgeted a certain amount for groceries and then inflation sends prices at the store skyrocketing, you'd have to rework your entire budget. But with an 80/20 budget, you can just spend what you need on groceries and stop spending on other non-essentials that month once you've reached your 80% spending limit. Now, this budget won't work for everyone because some people end up overspending if they don't have detailed limits for where their money should go. But if you set up an automated transfer to savings for 20% of your income and can live on the rest of what's left over without finding yourself short of cash and having to borrow, then there is no reason to get any more detailed with your budgeting process.

fool.com - 3 Reasons I Love the 80/20 Budgeting Method - The Motley Fool

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