You’ve probably heard of the popularized 80/20 rule, which applies to so many aspects of life. The Pareto Principle tells us that 20% of our work produces 80% of our results.
A Forbes article stated that:
“Vilfredo Federico Damaso Pareto was born in Italy in 1848. He would go on to become an important philosopher and economist. Legend has it that one day he noticed that 20% of the pea plants in his garden generated 80% of the healthy pea pods. This observation caused him to think about uneven distribution. He thought about wealth and discovered that 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies. The generalization became: 80% of results will come from just 20% of the action.”
Now let’s apply that to budgeting.
The 80/20 rule focuses on making sure that you pay yourself first. This is after-tax income, which you then split into two categories: 20% goes into an emergency fund and a retirement fund. Although Pareto’s Principle may not have been intended for finances, anyone familiar with it would recognize that saving is key. Technically, as long as you are saving and living within your means, you can do whatever you want with the rest.
You may be wondering how you budget with an 80/20 rule, and that is equally simple. This rule could be a great way to get yourself started and help you get on your way to investing and ensuring that you are living within your means.
If you want to start by creating a budget using free online software (like everydollar.com):
- go to the URL,
- click sign-in on the upper right-hand corner,
- then Create an account now and
- follow the steps to Create My Account.
For your first budget, don’t get overwhelmed by all of the possibilities. Instead, eliminate the areas within the 80/20 rule that don’t apply right now. Once you eliminate those, you will be left with three categories: income, savings, and lifestyle. If you follow the 80/20 rule, you will look at your net monthly pay (the amount that hits your bank account) and enter that in the income section. You will then multiply that amount by 20% to find your targeted savings. The remainder will be for lifestyle. It’s as simple as that! Once you get used to entering your transactions within these three categories, you can move into the 50/30/20 rule. (See accompanying YouTube video for a demonstration.)
Let’s say your gross income is $65k, and after deductions, retirement contributions, taxes, etc., you are left with an after-tax income of $46,150.00—resulting in $3,845.83 per month net pay to your account.
This practice may take 45-60 days to get the hang of, but once you’ve got it down, you will have some peace of mind knowing how much you are spending in the two categories, allowing you to prioritize saving and living within your means.
CTA:
My call to action comes down to building a Plan to Spend. Utilize EveryDollar (or one of the many other platforms out there for you to get on a budget). If you have never budgeted your money before, apply the 80/20 rule to start.
Sources:
80/20
https://www.thebalance.com/dont-like-tracking-expenses-try-the-80-20-budget-453602
Forbes
https://www.forbes.com/sites/kevinkruse/2016/03/07/80-20-rule/?sh=d221b3a3814b
