80 / 20 Budget

Guideposts

New to budgeting? Hate budgeting? Don’t have enough money (or time) to budget in the first place? If so, this budget may be the perfect solution for you. 

The 80/20 budget breaks down your monthly after-tax income into two categories:

  • 80% Expenses
  • 20% Savings

This percentage-based approach is great for budget-beginners, those who don’t like to track expenses, and those who might be budgeting off of a low income. It’s also a great strategy for those new to saving.

The 80/20 budget has also been known as the ‘pay yourself first’ or ‘anti’ budget. You may have also heard that it’s a near cousin of the 50/30/20 budget. We’ll explain what all this means in the text below. 

What is the 80/20 Budget Rule?

The 80/20 budget is a percentage-based budget to help anyone get on their feet. If you haven’t budgeted before but are looking to start, it can help. If you know that you should be saving money but aren’t, it can help. If you’re used to living solely off your paycheck, it can help with that too. 

Why is it so easy for anyone to adopt? Simply put, it’s really simple (pun intended… if that’s even a pun). 

To show you just how easy the 80/20 budget is, let’s use an example. Say your monthly after-tax income is $3,000. 

Calculate 80% of your monthly after-tax income: 

$3,000 x .80 (1 = 100%, so .8 is 80%) = $2,400.

Next, calculate 20% of your monthly after-tax income:

$3,000 x .2 (1 = 100%, so .2 is 20%) = $600

And there you have it!

Your 80/20 budget breakdown would then look like this:

80% Expenses: $2,400

20% Savings: $600

If your monthly after-tax income is different, simply repeat the same calculations above with your numbers. For convenience, we have a breakdown of additional examples below.

Monthly After-Tax Income80% Expenses20% Savings
$1,000$800$200
$2,000$1,600$400
$2,500$2,000$500
$3,000$2,400$600
$5,000$4,000$1,000
$6,000$4,800$1,200
$7,500$6,000$1,500
$10,000$8,000$2,000
Breakdown of 80/20 budget with different monthly income amounts

20% Savings

The premise of the 80/20 budget rule is that 80% of your money goes to your expenses. Meaning you don’t have to categorize your spending into categories. It also means that all you need to do is allocate 20% towards savings. 

Pay Yourself First

The best way to apply this budget rule is to spend that 20% first. When you get your pay check, save 20% of it. That way you don’t need to worry about how you spend the rest of your money. Nor will you forget to save 20% of your monthly after-tax income because you spent it on everything else. That’s why this is called the “anti” budget. Because there is little ‘budgeting’ involved. Have faith and believe that saving this money today will benefit you tomorrow. We promise it will. 

If you’re having a hard time putting that money into savings, consider automating it.

Automate Your Savings

Have you ever driven a car on the highway and noticed how often your speedometer fluctuates? Even if you try to drive the speed limit exactly, how often do you maintain that speed manually? For even the best drivers, this can prove challenging. It’s easy to get distracted by billboards or other cars, and our speed fluctuates as a result. 

How much easier then, is it to stay on track when you set cruise control? It’s in the label of course – it’s controlled. Many cars today have the tools built in to automatically drive a set speed for us. Your 20% savings can work the same way.

On or a few days after pay day, set up an auto-withdrawal to pull money from your checking account into a savings or other investment account. A few minutes setting this up can save you the struggle of setting aside 20% manually. Cruise control your savings!

Still not convinced? Here’s what those savings could turn into.

Saving 20% of Your Monthly After-tax Income Adds Up Over Time

What happens to that 20% of your monthly after-tax salary each month? Well, at $600 a month (20% carried down from our initial example), you’d be saving $7,200 each year. If you invested the same amount each year for 5 years, in something with a 7% estimated annual rate of return, you’d have contributed $36,100 with an additional $5,501 in interest for a total of $41,601! In 15 years, you’d have $181,314. And in 36 years, you’d have $1,073,768!

Saving today could make you a millionaire tomorrow. 

What if I Have a Low Income and Don’t Have 20% to Save?

For those who live paycheck to paycheck, saving 20% of your income might prove difficult. But saving shouldn’t be frightening. If you never set your sights higher than the next paycheck, you’ll only ever have “the next paycheck”. When looking at your financial mountain, it’s easy to find your upcoming journey daunting. You may even decide to head back down the mountain. But please, don’t. We believe in you! 

Start by saving 1% of your monthly income, and putting it into a savings account. Next, work towards saving 5% of your after-tax income. Then, 10%. And eventually, 20%. The hardest part will be getting from 1% to 5%. The next jump will be easier because you’ll begin recognizing the successes that got you the first 5%. And from there, you’ll make it all the way to 20% and beyond. 

Another way to help increase your savings percentage is to look at the major categories in your 80% of expenses. Large portions of your expenses are probably spent on things like food and housing. Whatever you spend the most money on, try to find ways to bring that monthly cost down. Cut down on housing by finding a roommate or downsizing your space. Lower food costs by meal prepping. You may even move closer to work to cut down on transportation costs. Whatever the case, managing your spending can help you find ways to increase your savings rate. 

80% Expenses 

In the 80/20 budget, 80% of your monthly after-tax income goes to your expenses. For the budget-hater, this is great news: the rest of your money is available to spend. No tracking necessary. That means your budget now includes everything from housing, food, transportation, utilities, (i.e. the necessities) to more leisure expenses like dining out and entertainment (i.e. your wants). You don’t need to categorize them. 

That’s also the main difference between the 80/20 budget and the 50/30/20 budget. In its simplest sense, the 50/30/20 budget is different only in that it breaks down the 80% of expenses into two categories: 50% for your “needs”, and 30% for your “wants”. This can be a helpful designation if you (or someone close to you) believes that you’re spending too much on yourself. 

80/20 Budget Takeaways

A budget can help be an early guidepost to navigating your financial terrain. The 80/20 budget rule is a great strategy to help you begin ascending your financial mountain. It’s simple, easy to apply, and can be an early stepping stone to your financial goals. 

Remember that this budget is a general rule of thumb. It’s set up for you as a minimum goal/expectation. Once you begin saving 20% regularly, work to increase your savings to 30-40%. Then 50-75%. Find ways to donate your wealth (see the 70/20/10 budget for guidance). Utilize your finances to buy yourself time and spend meaningfully to help generate lasting happiness for you and your loved ones. You can even experiment with other budgeting options once you get the hang of things. 

Just remember to stay disciplined and stay on track. Soon enough, you’ll be on your way to mastering your finances.

Climb on, FinBase. 

J

John

John

John is a personal finance writer, editor, and a fellow FinBase climber. Tech worker by day, design owl by night, he is the co-founder and creator behind The Financial Basecamp.
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