The 80/20 Budget: What’s It All About?

Do you feel like budgeting isn’t for you? Well, maybe you just haven’t found the right fit.

However, there’s an easy financial plan that prioritizes saving without the hassle of spreadsheets, notebooks, and tracking apps. Save first, spend later. That’s it.

It’s called the 80/20 budget.

The 80/20 budget divides your income into two expense categories based on percentages: savings and everything else. No more expense categories. No more tracking dollars and cents. Prioritize saving, then spend the rest however you like.

What is the 80/20 budget?

The 80/20 budget is a financial plan that helps people manage their money while prioritizing saving. It is a simplified version of the 50/30/20 budget.

The rule requires that you divide after-tax income into two categories: savings and everything else. As long as 20% of your income is used to pay yourself first, you’re free to spend the remaining 80% on needs and wants. That’s it; no expense categories, no tracking your individual dollars.

How does the 80/20 budget work?

The rule is simple — divide your after-tax income and allocate it as follows:

• 20% on savings
• 80% on everything else

20% savings

The one and only rule of the 80/20 budget is to prioritize saving. At least 20% of your income must go toward savings, everything else is negotiable.

Savings include an emergency fund, retirement savings, and other financial goals. Protect your financial health in the short-term with an emergency fund to guard against unexpected costs. Secure your financial health in the long-term by building up your retirement account (either a 401(k) or an IRA) and investments.

If you can't meet your savings goals, it’s time to trim expenses elsewhere. Look at your needs and wants, and cut spending where it makes sense. It’s typically easiest to reduce wants first — overspending on nonessentials — but don’t overlook needs. These expenses tend to be the more expensive budget busters, like rent or a mortgage.

80% everything else

The 80/20 budget allocates 80% of your income to everything beyond savings. It’s not necessary to differentiate between needs and wants. They both fall into the same bucket in this financial plan. Once you cover your savings goal each month, you’re free to spend the rest of your money however you like.

Needs

“Needs” include essentials like shelter, transportation, food, and health. More specifically, needs refer to things like rent or mortgage, utilities, gas, groceries, health insurance, and minimum debt payments.

Wants

“Wants” are nonessential but make life more enjoyable. They include dining out, attending concerts, movies, vacations, the latest electronics, and luxury items. Think of wants as the add-ons you excluded from the needs bucket. A want is a fancy steak dinner instead of groceries. It’s updating your cable package to include the highest internet speed and all the channels.

Is the 80/20 budget a good fit?

The 80/20 rule budget is one of the easiest financial plans because it has one golden rule: Save above everything else. This makes it simple and flexible. Consider it the stripped-down version of the 50/30/20 budget.

Here are other pros and cons of the 80/20 budget.

Pros

1. Simple: No more expense tracking, since your only priority is saving.
2. Flexible: You’re free to spend your money however you like on needs and wants, as long as you meet your savings goals.

Cons

1. Lack of structure: This isn’t a comprehensive financial plan that tracks your money down to the dollar. If you need more structure, try the 50/30/20 budget.

Bottom line

The 80/20 budget is a financial plan that prioritizes savings above all else. It’s a smart choice to start paying yourself first, but make sure you have control of your spending.