How The 80-20 Savings Rule Can Help Prepare You For The Rainy Days

Some people do not find it hard to save money. For most of us, however, money can be in our accounts one minute and then be zeroed before we know it. While you can get away with poor saving habits once in a while, you would not want to wait for that moment where you would be in dire need of money and would not have anything at all. While managing money would not come easy, financial literacy can be learned. When you live on a budget, you can achieve your financial goals easier. Here is one easy money trick that you should consider.

Never Spend Everything That Comes to Your Hand

Before you started working, you might have been given an allowance that would just be enough for your needs. You might have been saving, but it was just so that you could buy a new pair of shoes or something that you have been liking for a long time. Fast forward to when you start earning money. You will have more in your pocket. However, this is also the time you begin paying for your own bills and maybe sending your kids to school.

A lot of people count on what will come in with the next paycheck, and that is why they spend everything that they earn. This is a potentially dangerous habit. Always put in mind that you are not supposed everything that you earn or else you’ll be left with nothing when a real emergency comes.

What is the 80/20 Savings Rule?

The 80/20 savings approach is advisable for personal finances because it works for everyone with any goal, whether it be long- or short-term. Whether you are saving up for college, a vacation or planning for retirement, this approach is definitely for you.

This strategy focuses on a strict routine 80 percent of the time while you loosen up for the remaining 20 percent. When you live on a budget from Monday to Friday and treat yourself a little on the weekends, you can actually save up without feeling too much pressure. Another practice would be the strictly save 20 percent of your income, spend 50 percent on your needs and then allocated 30 percent to those which are not necessary or leisurely exploits. This money saving formula is very easy to remember and easy to follow.

Needs First

Before you can enjoy everything else, consider the essentials – the things you cannot do without. Your needs (ideally 50 percent of your income) should be spent on those that are absolutely necessary such as rent, mortgages, utilities, food and transportation. However, different situations call for different approaches. If you might find that living on 50 percent of your income would not be possible, adjust accordingly.

The Big Debate About Wants

Wants should be last on your priority list when you are serious about financial literacy and saving money. While you need to put away some amount for savings, it would not hurt too much to buy new pants once in a while, as long as it is within your spending range. However, spending on wants could get out of control easily and that is why it is this part of the budget that deserves the most caution.

It can be tough to differentiate a want from a need. For example: Internet could be a need if you work online, but could be a want if you use it for leisure. Just because it is food or found in the grocery does not mean that it is a want, since you do not need ice cream to live. Before making any purchase, ask yourself – “Is it something that is absolutely essential?”

Track Your Spending

Another big mistake that a lot of people make is just “winging it.” Money is counted in numbers. This is why you should do the math when you want to truly keep track of your expenses. For you to know how much you have spent on necessities and extras, and if you really have saved 20 percent of your income, you need to be extra vigilant in recording your expenses.

The 80/20 approach is a great way to learn about saving since it is easy to do. It is also realistic. However, this is only the beginning and you should not stop at 20. Saving will be a lifetime discipline and if you can push yourself towards higher percentages, that would be much better for you.

Have you tried this approach to saving? What other strategies have you adopted that worked? Share your experience with us in the comments below.