Budgeting feels hard? Try the 80/20 rule instead
What's the story
The 80/20 rule or the Pareto Principle could come handy while budgeting monthly expenses.
The principle states 80% of outcomes stem from 20% of causes.
In terms of personal finance, it would mean concentrating on the most impactful areas of spending to keep your budget in check.
By knowing and following this rule, you can simplify your financial planning and spending decisions.
Essential spending
Prioritize essential expenses
Start by picking essential expenses that make up about 80% of your monthly budget.
These usually are housing costs, utilities, groceries, transportation, and healthcare.
By prioritizing these key areas, you make sure your basic needs are taken care of before scattering funds across other categories.
This way, you stay financially stable and avoid stressing over essential payments.
Savings strategy
Allocate savings wisely
After accounting for necessary expenses, allocate a portion of your leftover income toward savings.
Try to save at least 20% of your income every month (if possible).
This portion can be split into various savings goals like an emergency fund or retirement savings.
Saving a portion of your income regularly guarantees long-term financial security and prepares you for unforeseen expenses or opportunities.
Discretionary spending
Limit non-essential spending
Once essentials and savings are accounted for, look at non-essential spending, which ideally shouldn't be more than 20% of your budget.
This includes dining out, entertainment, hobbies, and other discretionary purchases.
By keeping these expenses in check, and prioritizing what really adds value to your life, you keep impulsive spending habits at bay, while still enjoying leisure activities, within reason.
Budget review
Regularly review your budget
Finally, regularly reviewing your budget is essential to stick to the 80/20 rule in the long run.
Dedicate some time every month to check if you're hitting targets for essentials and savings while keeping discretionary costs in check.
You may need to tweak things according to income and lifestyle changes, but staying aware will keep you on track with your financial goals without affecting overall stability and growth.