The 80-20 Money Saving Formula
Saving is one of the hardest things to do especially if you have never followed the 80-20 money saving formula. Finding the right balance between how much you earn and spend or save can prove to be a huge challenge. It can be even harder if you are paying off loans or credit card debt.
If budgeting has never really been one of your strengths, perhaps you might want to consider a simpler approach, such as the 80-20 money-saving formula. When applied to your personal finances, this principle presents a standard that is simple enough to remember and if followed, can produce amazing results.
The main idea is adapted from the Pareto Principle, developed by Italian economist Vilfredo Pareto in the early 1900s. Pareto observed that only 20% of the people of the world owned 80% of the wealth. The rule postulates that 20% input can be responsible for 80% of the results. Therefore, it’s recommended that most of your efforts go to the smaller, yet vital part – the 20%.
How to Save 20% of Your Income Based on the 80-20 Money Saving Formula
The rule might sound a bit too simple, especially to people who have repeatedly tried and failed to manage their finances. It might even sound frustrating to those who just can’t afford the time to keep track of their spending and income. The good news is the 80-20 money saving formula rule is easy to remember and simple to follow.
To apply the principle you simply have to save 20% of your income—no more, no less—then spend the rest. As recommended by Elizabeth Warren and Amelia Tyagi, 50% of your income should be spent on your needs and 30% should go to your wants. That’s it. Three simple categories that make up the big picture.
Your needs would make up non-negotiable expenses including rent or mortgages, utilities, insurance, food, transportation costs, etc. Your wants, of course, would cover anything that isn’t a basic necessity, including entertainment and leisure and hobbies. Again, these two categories should not take up more than 80% of your monthly income.
If you find that either exceeds their respective allocations, it might be a sign that you are living beyond your means, which is the reason most people go deep in debt. If so, it could be the best time to start making some lifestyle adjustments. The goal is to find the right balance to paying for your basic needs, setting aside some money for the future, and at the same time, still be able to spend a little for your wants.
Balance Your Finances… and Your Life
The 80-20 money saving formula definitely works to strike the balance to your saving and spending. It enables you to provide for all your basic needs. Save for the future, and not to spend too much—or too little—on your wants. Amazingly saving can be easily accomplished through a simplified and easy-to-follow system.
Warren and Tyagi recommends that your goal in adapting the 80-20 money saving formula rule should be to move from your current situation to a better and more balanced financial state. This would require that you reassess what you consider as wants or needs. It could also call for a downsize in some areas and re-prioritizing your expenses.
If you succeed, it’s easier to be more flexible in your finances later on in life. Save up consistently and you will soon have enough to invest or pay off debt. Who knows, in a few years, where to spend or invest your money might be the only problem left for you to deal with!
You might take a little time to strictly follow the 80-20 money saving formula rule at first. It could be even easier than you think. Either way by following the practice you are in the process of developing good saving and spending habits. Just keep trying until the day comes when it no longer takes a conscious effort to set aside one-fifth of your income before you spend a dime on anything.
Author of the 80-20 Money Saving Formula:
Ian G. Elbanbuena is a blogger and infopreneur who writes on various topics mainly finance, self-improvement, business and marketing. At present he works on behalf of CompareHero , Malaysia’s leading comparison website. This portal helps individuals in making the best decision by comparing rates from different finance providers.