The 80/20 Budget

The 80/20 budget is best for consumers that may not be disciplined enough to stick to a strict budget and track their expenditures every month. The concept behind the 80/20 budget is that you save approximately 20% of your income while spending approximately 80% of your income. It’s not too difficult a concept to follow and it’s a relatively simple budget that allows consumers to progressively making progress with savings. If you can save about 20% or so of your income each month and make solid investments you’ll be in pretty good shape.

Self-Rewarding

The good thing about this technique is that you are essentially rewarding yourself first by spending on what you want (as long as it falls within the 80% rule) and then saving the leftover at the end of each month. When you save 20% of your income you can allocate it towards investments that could net you a return or into achieving a lifelong dream like being able to own a home.

Psychologically

Psychologically, the 80/20 budget feels more rewarding than a traditional budget and requires a lot less management—because you know that you can spend on yourself each month and the remainder can be put into various savings vehicles or investments. You’ll also see exponential rewards on any investment returns you from the savings you’ve accrued and this will help reinforce the positive benefits of saving. Those positive benefits will naturally want to make you save more and more! The more you save the more your future self will thank you! However, you don’t have to go overboard, saving within reason is a modest goal to have and for many consumers 20% is a manageable amount. It’s better to set a smaller goal that you can later more easily surpass down the line than trying to achieve too lofty a goal that will set you up for failure.

Ways to Capitalize on This Budgeting Tactic

Automatic Approach

A great way for consumers to capitalize on this technique and create a successful plan using this method is by utilizing direct withdrawals into a 401k or Roth IRA. Allocate a set amount to be depositing into retirement directly from your savings (let’s say 15% into diversified IRAs and 401k plans) and put the 5% remainder into brokerage accounts, emergency savings, etc. Do not forget to take the maximum advantage of employer matching as well, if you have one. With this method, your savings and retirement are basically set to autopilot and you don’t have retirement covered. Some consumers look to save 20% of their take home pay which will exclude automatic deductions from your paycheck so remember to keep this in mind. You can opt for whichever strategy is most beneficial to your lifestyle.

Manual Approach

You can also capitalize on the 80-20 method with manual savings and manual contributions into a brokerage or savings account. Not everything has to be automatic if you don’t want it to be, different savers and different investors have different strategies that work for them. The key is to find out what works best for you and how to establish a rhythm and sense of consistency that becomes easy to stick with.

Budgeting is a very important part of the process for many successful financial investors and a great way for many consumers to successfully attain their financial goals. Without a proper budgeting strategy, consumers are less likely to be successful in their financial and saving endeavors. Don’t be afraid to test multiple styles and methods and see which works best for you. After you’ve found your footing you can find a plan to stick that will help you become a successful and savvy student of finance and investor.