Mastering Money: How the 80/20 Rule Can Help You Save and Simplify Your Finances

Did you know that, back in 2022, the lack of financial literacy cost 15% of Americans at least ten grand? That’s right! While most can find a way to land a dream job that pays well, it’s not everyone’s cup of tea to effectively manage their money. As a matter of fact, many people have no clue that they may be spending more than they should without saving enough for their future!

However, the good thing is that it is never too late to start saving without complicating your finances. All you need is basic knowledge about how to save with regular effective budgeting. That’s why, in this article, we’ll discuss the 80/20 rule to help you simplify your finances while saving for the future!

What is the 80/20 rule?

The rule of 80/20 states that the inputs or causes are accountable for 80% of the outputs or effects. The rule is applicable in various fields, including business, productivity, economics, and finances. Vilfredo Pareto is credited with being the first to notice the 80/20 rule, commonly known as the Pareto principle. 

Vilfredo Pareto, a 19th-century economist and sociologist from Italy, discovered that nearly 20% of the pods of peas in his garden produced 80% of the peas. He took the concept into cognizance and went further to notice that 20% of the population owns almost 80% of the entire land in his country! It established the applicability of the principle in macroeconomics.

It made him contemplate that this same scenario could be observed almost in any field that involved numbers. So, he came up with the principle that 20% of the variables are responsible for 80% of the outcome. The principle is now popularly known as the “80/20” rule.

Although the rule applies in various areas, we’ll discuss its applicability in personal finance. 

In the context of savings

When it comes to savings, the 80/20 rule says that an individual should put 20% of their monthly income into savings. However, it’s totally up to you to put your money into a savings, brokerage, or retirement account. The rule focuses on putting aside enough money for the event of financial difficulty. As per the rule, you can use the remaining 80% of your earnings for wants and needs. 

Experts also say you should have enough savings to cover your living expenses for at least three to six months. Some even suggest that first building up an emergency fund is wiser than moving on to long-term investments.

In the context of investments

The 80/20 rule may be used in your investment/financial portfolio in two ways. The first way suggests investing 20% of the S&P 500 stocks, contributing 80% of the market’s total return.

The second way suggests creating an 80-20 allocation. That is, putting 80% of your entire investment into low-risk index funds to ensure a lower but steadier rate of return. At the same time, you can invest 20% of your investment into growth funds with higher risk but better returns.

How to draft out a budget using the 80/20 rule

The 80/20 rule is great for someone who does not know much about budgeting. Here’s how you can map out your monthly budget per the 80/20 rule and efficiently save money for your future without worrying about leading your usual lifestyle.

Laying out a Budget

It’s important to create a well-designed layout for your budget. There are several ways for this. You can choose to use an Excel sheet or a notebook to list your income and expenses. You can also find built-in budget templates on Google Sheets that simplify the process and make it more convenient.

Add Your Income

Once you have finalized a layout for your budget, you can go ahead to add your income. You can start by making a comprehensive list of all your monthly incomes. It may include your salary, investment returns, and other sources of income. 

Next, make a list of all the planned expenses for the month. It may include rent or mortgage, utility bills, groceries, transportation, entertainment, etc. 

Once you have a clear overview, set aside 20% of your total income for savings, this percentage ensures you prioritize building an emergency fund and securing your financial future. Assign the remaining 80% of your income for your planned expenses.

Make Your Budget Calendar

A budget calendar is an effective tool for tracking your financial obligations and commitments. Create a calendar format to mark important due dates for bills and EMIs. By noting down these dates, you will be more likely to pay them on time, avoiding late payment penalties and unnecessary stress. 

Your budget calendar helps you stay organized, ensuring you know your financial responsibilities throughout the month. However, only one in three Americans prefers to rely on a planned household budget.

Review the Budget

Regularly reviewing your budget is crucial for its accuracy and effectiveness. Take time to evaluate your budget periodically and make adjustments as necessary. For example, consider allocating the extra money toward your savings if…