This might be unfamiliar to many people, but this rule is a good way to think of the money you get in. Budgets are very important and will help you to manage your money every month. The 80/10/10 principle makes this easy.
What is the 80/10/10 budget?
It is a simple way of thinking and gives you an idea of how to use the money that you get in every month. There are a few different versions but the recommend options for most people is to:
- Spend 80%
- Invest 10%
- Reduce debt by 10%
The makes it easy to work out.
Let’s look at each one. We are going to start with the last one first and work back.
- Reduce debt – 10%
Debt can take up a lot of your money every month. It is something you pay for nothing in return. It might be related to your house, your car, your credit card, store accounts, or other debts. The important thing to understand is that it is a waste of money.
The faster you can get rid of debt the better. Look at the ones that charge the highest interest rate and pay those off as fast as possible. Some loans or debts cost more than others. Look at what you are paying. Sadly, many people spend a large amount of their monthly income paying interest on old debts.
- Invest/Save – 10%
There will come a time in your life when you either do not want to work or cannot work. The better you invest the easier it will be able to stop working one day. The sooner and the better you invest, the easier your old age will be.
People are living longer so you want to make sure you have enough money to retire. You don’t want to be old and living with little money or relying on other people.
The most important thing is to start as early as you can. Ideally, you should follow the 80/10/10 rule from the first day of work but most of us do not do that. You should, however, start with investing 10% of your monthly income as soon as possible.
This will allow you to enjoy a retirement that is free of stress and let you enjoy some pleasures in life. If you do this from an early age you will have enough money to relax. If you leave it too late you will either have to work for longer or live a lower quality of life.
- Spend – 80%
You have to spend to survive. This will include your rent or home loan repayment, your car, and monthly expenses. It is a good idea to draw up a budget to control these expenses. Include the fixed costs you have to pay every month.
A roof over your head and food on the table are the basic things you need for you and your family. Security is also important.
You also need to keep money aside for food, groceries and toiletries, transport, entertainment, and day to day expenses.
Do understand that fun and entertainment are important for you and the family so set some money aside for that. It is no good “saving” money when you are stuck inside all day. You still have to enjoy life. Budget for that.
You also want to keep some money aside for emergencies or unexpected circumstances. You do not want to be stuck with no money with things get difficult. It is always important to have a cash reserve or money in the bank in case something unexpected happens.
- Giving back
You can build this into part of your budget if you choose. Most people like to give back if they can afford to. You obviously have to look after yourself and your family first but if and when you can, it is good to give to those less fortunate.
Do not give back more than you can afford and make sure it is going to a worthy cause. There are many good charities and places to help but there are also many scams. Check them out before giving your hard-earned money.
- Flexibility and variations
These rules are there as guidelines for the average people. They might not be perfect for everyone all the time. You need to adapt according to your needs.
If you can invest more, that is great. If debt is crippling you, it might be an idea to pause investments for a short time and pay off debt. Investing is important so only do this when it is critical and carry on investing as soon as you can.
Is this a good plan?
If you stick to it the 80/10/10 principle is a brilliant idea. It will help you to budget, save, and allocate your money. You need to think about your situation and decide what is best but paying off debt and saving is so important.
You need to live and enjoy life but think about the future. Debt will drain your money. Starting to invest earlier in life will make retirement easier. If you stick to the basics of this plan, you should be able to lead a comfortable life.
Investing early and reducing debt might not make you rich but it will sure make your life more comfortable and lead to a happier retirement.
Final thoughts
There are no perfect plans and we all need to adapt to our circumstances. The 80/10/10 idea can help people to create an idea. You have to be flexible and adapt according to your needs but remember to put some money away to invest and pay off your debts.
If you start this plan early in life it is quite easy. If it is later in life, you might have to make a few changes. Either way, it is a good idea and something that will help you. Give some thought to the 80/10/10 principle. It might help you.
So in short. If you have 100,- today…which you earned through your normal work, or any odd job that you had, ensure that you eat only 80,- of it. Put 10,- to your savings and use 10,- to reduce your debt! Every dollar counts!
The 10,- you put to your debt actually counts much more…because you are showing commitment to the lenders that you are willing to pay off the debt…which counts a lot towards how much they trust you!
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