The 80-20 Money Saving Formula

Dec
07
2013

The 80-20 Money Saving Formula

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.

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

20%-of-your-income

The good news is the 80-20 money saving formula rule easy to remember and simple to follow

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.

allocating-expenses

If you find that either exceeds their respective allocations, it might be a sign that you are living beyond your means

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

80-20-money-saving-formula-balance

The 80-20 money-saving formula definitely works to strike the balance to your saving and spending

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!

80-20-money-saving-formula-debt-free

If you succeed, it’s easier to be more flexible in your finances later on in life.

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-elbanbuenaIan 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.

 

Comments

  1. I set up an automatic transfer of savings before spending money so all the rest I can spend and know savings are already taken care of.
    Pauline recently posted…Cheap winter days out around LondonMy Profile

  2. I love this approach. Back in my “terrible with money” days, my eyes glazed over when my mentor urged me to shift from spender to saver. The problem was the gap between our lifestyles and I knew I couldn’t even come close to living as frugally as she did.

    This concept has appeal because it allows you to satisfy your wants on some level. You can ease into the transition from spender to saver. In fact, if 20% seems too daunting, start with 10% or even 5% to begin to develop a savings habit.

    Loved the post!
    Ree
    Ree Klein recently posted…3 Golden Reasons Why You Should Think of Your Dollars as EmployeesMy Profile

  3. Nice writeup Ian, Saving small amount of money every month is a good idea, as after a year you don’t see small amount it will be something huge which may come across to solve your needs.

    You can invest the huge in something like buying a home or car r saving for your child studies or some unexpected cash burners.
    yatra recently posted…Save 10% on Viva ThemesMy Profile

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