The 80/20 budget has one rule. You just need to save 20 percent of your take-home pay. That’s it. How you spend the remaining 80 percent of your income is up to you. 

The 80/20 budget’s primary tenet is that by prioritizing your savings, you’re establishing a strong financial foundation without performing too much mental arithmetic. As long as you give your savings account its fair share every month, you don’t need someone else telling you how to spend your money. 

For some, this flexibility makes budgeting much less intimidating and more accessible. For others, the “pay yourself first” way lacks structure and can lead to overspending. Keep reading to find out where you fall on this scale. Below, you’ll learn everything there is to know about the 80/20 budget.

The 80/20 Budget, Defined

The 80/20 budget splits your take-home pay (that’s your income minus all deductibles) into two main categories:

1. Savings
2. Spending

Let’s get into the meaning behind the categories.

1. What Is Your Savings Category?

Savings assume 20 percent of your take-home pay, to be split between your many goals, including emergency, sinking, and retirement funds. While these savings are all vital to healthy finances, they serve different purposes in your life. 

Sinking funds help you save up for big, planned purchases like vacations, concert tickets, gadgets, and renovations. Your goal reflects your unique purchase, so there are no rules about how much you need. 

An emergency fund is by far more important, as it helps you tackle the unexpected. These savings give you the financial flexibility to make urgent repairs or cover medical expenses, even when your paycheck is tied up with the usual bills. To ensure you’re prepared for nearly anything, you should aim to save three to six months of living expenses in this fund eventually.

According to the Economic Hardship Reporting Project director Alissa Quart, the average American family would take more than two years to squirrel away just one month of living expenses. If your emergency arrives faster than you can save, consider an online loan. Legitimate online loan companies like MoneyKey provide and service online loans that work as backup to insufficient savings.

Online loans with quick, virtual applications can streamline the borrowing experience, so you know if you qualify without delay. This automated approach to online loans helps you react quickly to unexpected expenses that have a short timeline.  

Lastly, your retirement fund supplements your pension and provides income for when you stop working late in life. Generalized financial advice recommends saving one million dollars in this fund by the time you retire; however, you may need more or less depending on your lifestyle. Such a large savings goal is easier to achieve the earlier you start saving, as you can capitalize on annual compound interest. 

2. What Is Your Spending Category?

By necessity, your spending category absorbs everything left out of the funds explained above. You’re expected to cover your housing costs, online loan payments, utility bills, groceries, taxes, and fun everyday expenses with the leftover 80 percent. 

Since it’s responsible for both your essential and discretionary expenses, this category has a lot of pressure riding on it. You need to make sure your reserve enough of this cash to cover all your essentials before you start splurging on discretionary spending. 

What Are the Pros of the 80/20 Budget?

People who prefer a more laid-back approach to budgeting will appreciate this method. The 80/20 budget doesn’t have a lot of rules, besides the one about saving, so you can spend your money organically as you see fit. 

Another advantage to adopting this budget is how much time you’ll save compared to other methods, particularly the 50/30/20 budget. The 80/20 is a simplified version of the 50/30/20 budget, first popularized by Elizabeth Warren in the early noughties. She recommends splitting your take-home pay between essentials, wants, and savings, each taking their respective 50, 30, and 20 percent of your income. 

Organizing spending between your essentials and wants can be tricky, especially when it comes to categories that overlap, like groceries and takeout, clothing, and phone bills. (You need a phone to communicate, but do you really need that 50GB of data?). 

Eliminating the boundaries between essentials and wants removes some of the stress you feel for finding labels for all your spending. 

What Are the Cons of the 80/20 Budget?

This budget can be challenging for those people who prefer having orderly categories for their spending. If you need structure to keep you on task, the 80/20 budget may be too lenient for your liking. 

When you don’t track your spending, you can easily lose track of how much money you spend. You can accidentally spend most of your cash on frills and not have enough to pay your bills at the end of the month. 

This can jumpstart a cycle of paying bills late, accruing late fines, and taking out online loans to recover. While an online loan or line of credit can help in an emergency, it shouldn’t be the way you balance your budget. 

Bottom Line: 

The 80/20 budget works best for people who can keep a mental tally of their spending in their heads. More importantly, they don’t need to keep a detailed list of their spending to ensure they pay for the important things first before they indulge in the fun stuff. However, if you require structure to keep your spending on track, you might fare better by choosing an alternative option, like the 50/30/20, reverse, or envelope budgets.