CREATING A BUDGET PLAN

You can only spend your money once. Creating a budgeting plan is about planning out how to spend that money. When you consider the word budgeting the word savings automatically comes to mind. Relying on your own savings is the opposite of having to rely on taking on debt. Although savings is an extremely important part of budgeting, it is more important to focus on the other part of budgeting, which is spending. Budgeting is all about intentional spending. A dollar is worth a dollar even if you earn it through your job, find it on the floor, or receive it as a gift. No matter how you receive it, what you do with that dollar should have a plan. Consider that if you spend that dollar on something, you lose the ability to spend that dollar on everything else that you would rather spend it on. A great way to spend wisely and to create a budget is the 80-20 Budgeting Plan. 

WHAT IS IT?

The 80-20 Budgeting Plan consists of spending 80% and saving 20% of the money you have coming in. In terms of the spending, this further breaks down to 50% spending going towards your needs and 30% going towards your wants. Having 50% of your budget set aside for needs ensures that you do not spend too much on bills by doing things such as getting an apartment, house, or car that takes up so much of your spending that you are left with no money to be able to spend on anything else. If your needs require spending more than 50% of the money you have coming in, your needs are either too high or your income is too low. Having more money certainly helps with accomplishing this goal, however, as you are raising your income to get to that point in terms of the money you have coming in, it will be important to minimize the total cost of your needs as much as you can. Setting 30% of your budget on wants ensures that you do not spend too much money on non-essentials leaving you no additional money to save or not enough money to pay for all your needs. You do not have to spend 30% of your money on wants, but this plan allows for you to have that option available. You have to be honest with yourself about what is a need and what is a want as this is different for every single person. 

As your income increases, it is tempting to spend more money than you did previously. You may even begin to relax on tracking your spending due to your increased flexibility in what 80% of your budget equals, but you want to ensure that you continue budgeting to keep your spending intentional. Also, remember that your savings can be more than 20%. 

Setting 20% of your budget towards savings ensures that you are thinking long term. This portion of your budget can go towards a general savings account, an emergency fund, saving for a goal, or extra debt payments. 

Savings Goals:

Goal 1- Save enough for an emergency fund; $1,000 is a suitable amount for this. 

Most financial emergencies you will deal with cost under a $1,000. Reaching this goal first is important as it will allow you to borrow from yourself instead of from someone else, which typically brings with it that added amount you have to pay back. If you ever take money out of this $1,000 emergency fund, make sure that this was truly done for an emergency. Once you spend this money, you no longer have access to the funds should another emergency arise so make sure that you replenish the account as soon as possible to get it back to a $1,000 balance. You never know when the next emergency will come so you want to continue protecting yourself.

Goal 2: Save enough to cover three months’ worth of expenses. 

Goal 3: Save enough to cover six months’ worth of expenses. 

Goal three will take a long time to reach, it may even take years of focused effort. Getting to it will give you the peace of mind that if financially something negatively impactful should happen, you have some time to figure out how to get things back on track. Life emergencies can become financial emergencies. Goal three will help ensure that you are not dealing with a financial burden on top of your other hardships.

The 80-20 Budgeting Plan can be challenging because if you are not able to save 20% unfortunately the only two ways to fix this problem is to lower your needs and wants where possible or increase your income to increase how much 80% of that will look like. Sometimes your needs itself may even take more than 80% of the money you have coming in. Once you accomplish this plan, a change in your life such as a new baby, losing your partner, needing to support your parents, or other financially impactful occurrences can remove your ability to maintain this plan. However, it still helps to keep this plan in focus and try to get back to it.

One of the best ways to accomplish this plan is to focus on the three big spending areas: housing, transportation, and food. Finding an apartment or house well below your budget or living with roommates are great ways to lower your spending. If you live in an area where most things are within walking distance or an area that has great public transportation, relying on these instead of your own car which comes with the cost of the car itself, maintenance, gas, and insurance could be a better alternative. You can always use a ride share service or rent an appropriate vehicle should you need it for a special event. Finally, lowering your food costs can help cut your expenses drastically. Planning and grocery shopping to avoid take-out food or fast food will help. For those who are busy, you can always cook large dishes that will last multiple meals. If you still go out to eat, there are still a few steps you can take to lower your overall cost. Do not go out for breakfast as these meals tend to have the highest markup, think about how much a carton of eggs cost. If you go out for lunch or dinner, order food that will leave leftovers to cover multiple meals. 

Getting to saving 20% is not easy, but each step you take will help get you closer to it. Even saving 1% is better than saving 0%. Looking at the savings goals, I would add a fourth goal: Invest 20%. However, this goal should be a focus after accomplishing the third goal of saving six months’ worth of expenses. 

Why is this called the 80-20 Budgeting Plan instead of the 50-30-20 Budgeting Plan?

• Saving 20% can be a challenge, but what can make it even more challenging is if your budget for needs is too high. If you find that you are spending too much on your needs, the category that you should cut back on is your wants, which is why the 50 and 30 are put together as spendings. There are times that you may find that you may even need over 80% of your money to go into needs. The big mistake people make is that they fund their needs and their wants if they do not have enough by going into their 20% savings budget. This should only be done as a last resort for your needs after cutting your wants.

Why should I separate saving for a goal from my regular savings?

• Saving for a goal makes it a part of a future spending in the 80% category. Saving for a vacation, new car, new house, or even retirement is for a future need or want. Therefore, it helps to keep the categories separate. Also, this will help with long term planning as knowing that you are saving for that vacation that you have always wanted to take may hopefully motivate you to take the few dollars you were about to spend on a want today and put it aside for a much bigger and more rewarding want later. 

How does making extra debt payments save you money?

When you borrow money, you will generally be expected to pay back with extra. Part of this sometimes depends on the total amount that you owe. Let’s say for example your credit card company wants you to pay back an extra 10% on what you owe them already. If you currently owe $1,000, you may have to pay an extra $100. However, if you were to make an extra debt payment of $200, your credit card company would now calculate the 10% off the $800 you owe making the extra that you must pay $80 instead. You have now saved the $20 you would have paid to someone else and can instead use it for yourself.