How the 80-20 Money Saving Formula Can Work for you

by Mike on April 17, 2014

How the 80-20 Money Saving Formula Can Work for you

We all want to save money! However, the common dilemma for many wage earners is knowing how to take the correct action to achieve the outcome of sound financial management and financial planning for future retirement.  The million dollar question is how to allot your income to ensure a proper division for daily life, savings and investments for the future. What do you do when it’s payday? Is your salary enough to cover your needs and wants?

Thus its a good thing that there exists the 80-20 Money Saving Formula especially if budgeting is not your forte and a simpler approach to your savings should and can help. The 80-20 Money Saving formula is easy to follow but can produce big payoffs. It was started by an Italian economist Vilfredo Pareto in the early 1900s. Also known as Pareto’s Principle this practice has been taught and followed through generations and with luck can become a common practice applied by us all.

Here’s how it should go: Among any other money-saving tips, this rule is simpler to follow especially if you have repeatedly tried and failed to manage your finances. You simply have to save 20% of your income, and then spend the rest (50% to your needs; 30% to your wants).

Needs & Wants

Your needs would make up your non-negotiable expenses like your rent, utility bills, food, transportation costs, etc. Your wants cover anything that is not your basic necessity like leisure, hobbies and entertainment. Anything that you can live without like a super upgraded phone, or a luxurious travel.These two should not take up 80% of your income. If you exceed 80% it is a clear sign that you are spending beyond your means and could be a reason how you can be drowned in debt. If you’re on the verge of spending on something, be sure to make a sound decision and identify if it’s a need or a want.

Consider a lifestyle adjustment

Find the right balance of paying your needs while setting aside some money for your future without sacrificing your wants. This money-saving idea definitely works to strike the balance of spending and saving – saving for the future, spending just right for your needs and wants. If you adjust your lifestyle according to your goals, then you’re good to go.

Why will you fail?

This rule may not work for all simply because people have different spending and saving behaviors. Also it depends upon a person’s dreams, self-control, and capability to abstain. There will be a different level of difficulty when it comes to dealing with the 80-20 rule among people.

But…Keep trying

Just like any new strategy this money-saving tip could be difficult to practice at first. Just keep trying until the day comes that it’s no longer a chore for you to set aside a part of your income before you spend for anything. Here are some tips to ease your agony:

  • Each time you spend ask to see if you can get a reduction on the cost for each item or service you get. If you really want to save, every single cent should matter to you and if you dont ask you will never know.
  • A big part of your income doesn’t really go straight into your savings. So save then spend, and then look at take a look at how you spend.
  • The balance of your income and its fate will depend on how disciplined you can be as a spender. If your focused and responsible the balance will remain in your savings fund. If you lose focus then the remaining 20% will disapear sooner or later without much to show for it.

The promise

If you make it a point so that this practice is no-sweat for you it will be easier to be more flexible in your finances later on. Investing and paying off all your debts can and will be easier as you go along. Who knows, after years of practicing it, investing and spending your money might be the only problem left for you to deal with if ever.

 

Do you think you can follow this principle?

 

***Photo thanks to Atti Vitoso***

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