How to Set an 80/20 Budget
When you are budgeting, you will likely receive advice on how to focus on saving as early and often as possible.
“Treat your savings like a bill that you have to pay yourself,” you may have heard. Because if you leave the savings for “extra” money or at the end of the month, you probably won’t prioritize saving that money. You will probably decide to order pizza instead.
But if you don’t know how to take savings off the top of your budget to keep it safe, an 80/20 budget might be right for you. It’s also known as a pay-yourself-first budget or anti-budget because there is only one key goal to worry about every month: your savings (20% of your income). Everything else, from essentials to “fun money”, put in one big bucket for … well, everything else (80%).
I like this budget, especially for several groups of public sector employees. First, there are people who aren’t making a ton of money or are perhaps just starting to create a savings cushion. This budgeting method essentially says, “Look, your spending can be a little hectic, but if you’re worried about saving, everything else will work just fine.”
It’s also good for people who are comfortable with the amount of money they make – I say, maybe too comfortable. Maybe this is your first job after college, you recently paid off a big debt, or you just got a big promotion. It’s easy to get into the habit of pampering yourself and letting lifestyle inflation eat up your money that isn’t meant for the things you really need.
Let’s see it in action, shall we?
Using the same example we used for the three previous budgeting methods ( 50/20/30 budget, 60/40 budget, and zero base budget ), this hypothetical person makes $ 50,000 per year before federal taxes and does not pay government income tax. They do not make any pre-tax deductions in 401 (k) or any other account. Their health insurance premiums are covered by their employer.
Things are going well here. The biggest problem is that they are over budget by a few dollars, but we can’t fix anything.
So, a hypothetical person negotiates a better phone bill rate, gets half a gallon of ice cream every month at the supermarket, and puts in four dollars less in savings, so we line up the money in and out.
Now that we don’t spend more than we earn, you’re probably thinking, “Lisa, this is a 60/40 budget.”
And this is pretty much true! But I want you to imagine the future for a moment.
This person will not be forever in debt if the odds are in his favor. Let’s say our example pays off their debt, bringing their total savings and debt down to $ 900 a month instead of about $ 1200. This reduces the savings by up to 29%.
And it will continue to evolve. Maybe our Hypothetical Person will have a really strong emergency fund, and he decides to channel these funds into something else, be it another savings mechanism or living expenses.
Or maybe later on, our example shows that they want to keep saving a ton of their income. So they abandon the 80/20 goal and choose a different budgeting method that suits their aspirations or lifestyle.
And that’s the whole point. You probably won’t find the “perfect” first-time budgeting method for yourself. But if you’re willing to experiment, you’re sure to find an option that suits your needs right now – and lets you know when it’s time to consider another option.