How to Follow an 80‐20 Budget
Determine your “take home” income., Calculate 20% of your take home income., Figure out what you get to spend., Adjust your lifestyle.
Step-by-Step Guide
-
Step 1: Determine your “take home” income.
This is your income after taxes, health insurance, retirement savings, or any other expenses are taken directly out of your paycheck.
In other words, your “take home” income is the amount of money you take home each time you get paid.If your income fluctuates, try to figure out a monthly average.
Let's say you get paid bi-monthly, and your take home amount ranges from $800 to $1200 (meaning your monthly take home is $1600 to $2400).
Determine your monthly take home from the past six months and add these together. (Let's say it was $1900, $2100, $1800, $2400, $2000 and $2300.
Added together, this comes to $12,500).
Then divide this number by
6. ($12,500 divided by 6 is $2083.33).
The figure you come up with is your monthly average.
Use this average to calculate your spending and savings goals. -
Step 2: Calculate 20% of your take home income.
You can arrive at this figure by multiplying your take home income by
0.2.
The number you get is what you need to save.Let’s say your take home pay is $5000. 5000 multiplied by
0.2 is
1000. $1,000 is 20% of your take home pay, so $1,000 is what you need to save each payday. , The remaining 80% is what you can spend on both “needs” and “wants.” The main appeal of an 80-20 budget (as opposed to other budget plans) is that you do not need to do line item budgeting.
However, in order to begin, you must ensure that you can make that 80% cover your essential needs, as well as your wants (things like restaurants, movies, beer, or other fun stuff).A good rule of thumb is to spend roughly 50% of your take home income on “needs” and the remaining 30% on “wants.” Essential needs include housing, utility, transportation, and food costs.
Wants are basically everything else.
This includes travel, restaurants, bars, and most material goods. , In order for this 80-20 savings plan to work, you may need to make some changes to your lifestyle.
If you are accustomed to spending 100% of your income each payday, you will need to make some adjustments to your spending.
Remember that a good balance is to spend 50% on essentials, and 30% on things you want.If your bills and other essentials come to more than 50% of your take home, is there a way to cut costs? Perhaps you could reduce your food costs by buying in bulk, or keep your utilities low by watching your electricity usage? If it is a large discrepancy, maybe you could move to a location with lower rent.
What is more likely is that your “wants” are exceeding 30%.
Perhaps you can make coffee at home instead of grabbing it on the go? Maybe you need to limit yourself to one restaurant meal per week (or month).
Is it possible you have been purchasing items that you could live with out? Try making a list before going to the store and sticking to it. -
Step 3: Figure out what you get to spend.
-
Step 4: Adjust your lifestyle.
Detailed Guide
This is your income after taxes, health insurance, retirement savings, or any other expenses are taken directly out of your paycheck.
In other words, your “take home” income is the amount of money you take home each time you get paid.If your income fluctuates, try to figure out a monthly average.
Let's say you get paid bi-monthly, and your take home amount ranges from $800 to $1200 (meaning your monthly take home is $1600 to $2400).
Determine your monthly take home from the past six months and add these together. (Let's say it was $1900, $2100, $1800, $2400, $2000 and $2300.
Added together, this comes to $12,500).
Then divide this number by
6. ($12,500 divided by 6 is $2083.33).
The figure you come up with is your monthly average.
Use this average to calculate your spending and savings goals.
You can arrive at this figure by multiplying your take home income by
0.2.
The number you get is what you need to save.Let’s say your take home pay is $5000. 5000 multiplied by
0.2 is
1000. $1,000 is 20% of your take home pay, so $1,000 is what you need to save each payday. , The remaining 80% is what you can spend on both “needs” and “wants.” The main appeal of an 80-20 budget (as opposed to other budget plans) is that you do not need to do line item budgeting.
However, in order to begin, you must ensure that you can make that 80% cover your essential needs, as well as your wants (things like restaurants, movies, beer, or other fun stuff).A good rule of thumb is to spend roughly 50% of your take home income on “needs” and the remaining 30% on “wants.” Essential needs include housing, utility, transportation, and food costs.
Wants are basically everything else.
This includes travel, restaurants, bars, and most material goods. , In order for this 80-20 savings plan to work, you may need to make some changes to your lifestyle.
If you are accustomed to spending 100% of your income each payday, you will need to make some adjustments to your spending.
Remember that a good balance is to spend 50% on essentials, and 30% on things you want.If your bills and other essentials come to more than 50% of your take home, is there a way to cut costs? Perhaps you could reduce your food costs by buying in bulk, or keep your utilities low by watching your electricity usage? If it is a large discrepancy, maybe you could move to a location with lower rent.
What is more likely is that your “wants” are exceeding 30%.
Perhaps you can make coffee at home instead of grabbing it on the go? Maybe you need to limit yourself to one restaurant meal per week (or month).
Is it possible you have been purchasing items that you could live with out? Try making a list before going to the store and sticking to it.
About the Author
Donald Rodriguez
Brings years of experience writing about practical skills and related subjects.
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