FUNDAMENTALS OF BUDGETING
THE 80/20 RULE
Massive change is happening around the world right now. Flight Centre have closed 100 stores, Myer has closed all Australian stores and many full time, part time and even casual workers are losing their jobs. Amongst the casualties of individuals, many of the leading corporations are now being forced to close either temporarily or for good.
Come March 30, 2020 about 10,000 Myer staff will be stood down without pay. Full time and part time staff would be able to access annual leave and long service entitlements only. On the other hand, a “small group” of business-critical roles will be kept on to handle essential work and support online purchases. Of these workers, they will be paid and work only to 80% of their current salary. *According to page 11 of The Advertiser (Saturday March 28th 2020)
What is the 80/20 rule?
Australians living week to week need every single dollar they earn come pay day, so a hit of 20% to your current pay can be absolutely catastrophic. But what about savvy budgeters? Savvy budgeters do things differently to everyday people. Instead of spending what they earn and saving the rest, they save first then spend. By doing this, you may only be living off 90% of your wage, or 70% of your wage with the remaining 10-30% being put straight into savings.
This might seem insignificant like “not a big deal,” but it is a really big deal – especially when workers, like Myer above, take a hit of 20% to their income. It would mean that if these workers applied the 80/20 rule to their budget that they would be unable to save money for the short-term, and their current “way of life” would not be significantly affected, from a financial standpoint. It would also mean that they have savings to ride the storm.
How does the 80/20 rule work?
Say you are earning $52,000, as a single person net per year, or $1000 per week, using whole numbers to keep the process simple. The 80/20 rule works as follows.
- 20% saved = $200 into savings account.
- 80% spent = $800 for lifestyle expenses/bills/mortgage etc.
In a typical year, you would have saved $10,400 by saving 20% of your income, before spending. For a couple you could potentially double this estimation and add even more! In the case above, it would mean that you would not be able to achieve these savings in the short-term, but at least everything that is essential to your budget and way of life going forward, is covered by a 20% reduction in your wages!
The flexibility of the 80/20 rule
Your split doesn’t necessarily need to be 80/20, it might be 40/60, or 50/50, or even 70/30. It all depends on how you spend your money, what kind of life you choose to have and what your attitude is around debt and debt management. It all starts with having the right budget.
This is why you always keep hearing us bang on about – do you know your numbers? The importance of knowing your numbers… etc. When you know your numbers your world of opportunities can open greatly! You are able to make better financial decisions and when bumps in the road occur you have a back-up plan dedicated to keep you on the right track.
Learn to have a backup plan so when life gives you lemons, you can start making margaritas!