Have you ever wondered if there’s an easy way to manage your money without feeling overwhelmed? Good news—there is! By using the 80/20 budgeting rule, you can simplify your budget, focus on your priorities, and start saving without the headaches. This method combines the classic “Pareto Principle” with elements of the well-known 50/30/20 budget approach. Ready to see how it works?
What is the 80/20 Budgeting Rule?
The 80/20 budgeting rule is a simple approach to money management, designed to keep budgeting easy and effective. Here’s how it works: you allocate 80% of your income toward your regular expenses and spending and save the remaining 20%.
Think of it as taking a practical path to budgeting. Instead of tracking every dollar, you focus on just two categories: expenses and savings. It’s like the “set-it-and-forget-it” method for people who want budgeting to be easier.
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Why the 80/20 Rule Works for Many Canadians
This rule is based on the Pareto Principle, also known as the “80/20 rule,” which suggests that 80% of results come from 20% of efforts. In terms of budgeting, that means focusing on the big picture—getting your savings and spending in balance rather than worrying about every little purchase.
For Canadians, the 80/20 rule is ideal because it’s simple, straightforward, and doesn’t take hours to track. Plus, you can adjust it to fit your lifestyle, making it flexible for different needs and goals.
How the 80/20 Budget Works
Let’s break down how the 80/20 budget works in practice. Imagine you’re working with a monthly income of $4,000 after taxes. Here’s how to apply the rule:
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80% ($3,200) for Expenses:
This portion covers all your regular expenses, like rent or mortgage, groceries, transportation, and anything else you spend on.
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20% ($800) for Savings:
This goes toward your future, such as building an emergency fund, investing in RRSPs, adding to a TFSA or taking a vacation.
See? It’s simple—just two categories to keep in mind.
Example: Emma’s Budget Makeover with the 80/20 Rule
Emma, a young professional in Toronto, felt stressed about money each month. She had heard of the 80/20 rule and decided to try it. By setting aside 20% of her income for savings right off the top, she knew exactly how much she could spend on expenses without guilt.
Within a few months, Emma noticed her savings growing without feeling like she was sacrificing her lifestyle. The simplicity of the 80/20 rule made budgeting less stressful and more effective for her.
How to Get Started with the 80/20 Rule
Interested in trying the 80/20 rule yourself? Follow these steps to set up your budget in just a few easy moves:
1. Calculate Your Monthly Income
Start with your monthly take-home pay. Make sure to include all sources of income, including side gigs or rental income, if applicable.
Action Step:
Add up your after-tax and other deductions income to get a clear picture of how much you have to work with each month. Write it down to make it real and give yourself a solid starting point.
2. Divide Your Income Using the 80/20 Rule
Multiply your total monthly income by 0.80 to find your expenses budget. Then, multiply by 0.20 to determine your monthly savings target.
Action Step:
If you’re not used to saving 20%, try gradually working up to this amount. Start by saving 5% or 10%, then increase it until you reach the 20% goal. Small steps make a big difference over time.
When I was first married, money was very tight, so we probably used the 95/5 Rule and gradually transitioned to the 80/20 Rule. In retirement, we find that a 60/40 split works for us. It’s all about reaching the goals you set.
Don’t look at the rule as law, but as a guide to help you attain your goals. Adjust it as often as necessary to meet your goals.
3. Track and Adjust as Needed
Once you start using the 80/20 rule, track your spending to see if it fits within your 80% category. If you’re overspending, look for areas where you can cut back. Need a bit of help? Many Canadian banks now offer free budgeting apps to help you track spending easily.
Action Step:
Try using a budgeting app provided by your bank, or explore free Canadian budgeting tools like the done from your bank, YNAB – free for 34 days or Good Budget – both free and paid apps. See what works best for you!
We offer a number of free budget planning materials at Free Planning Materials.
Why This Budgeting Method is Different from 50/30/20
Some people might wonder, “Isn’t this just like the 50/30/20 budget?” Not quite! While the 50/30/20 method splits income across three categories—50% for needs, 30% for wants, and 20% for savings—the 80/20 rule is simpler.
With the 80/20 rule, you only need to focus on two categories, which can make it easier to manage, especially if you’re new to budgeting. It’s also more flexible if you want to cut out unnecessary spending altogether and put it toward your goals.
Example: Sarah and Mike’s Flexible 80/20 Budget
Sarah and Mike are a couple from Calgary trying to save for a home. They found that the 80/20 rule helped them build savings faster because they didn’t have to worry about splitting expenses into multiple categories. The simplicity let them focus on what matters most to them—buying their first home.
Benefits of the 80/20 Budget
Why choose the 80/20 budget? Here are some reasons it works so well:
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Easy to Start:
The 80/20 rule doesn’t require you to track every small purchase.
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Flexible for Different Goals:
Whether you’re saving for retirement, a home, or a vacation, this rule adapts to your goals.
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Less Stress:
With fewer categories, the 80/20 rule reduces the hassle of complex budgeting.
What If You Can’t Save 20% Right Now?
Not everyone can save 20% of their income immediately, and that’s okay! If you’re dealing with debt or a tight budget, start small and increase savings over time. The key is to make savings a habit, even if you’re only putting aside 5% or 10% for now.
Action Step:
Focus on automating your savings, so you don’t have to think about it. Set up an automatic transfer from your chequing account to your savings account each payday—even a small amount adds up over time.
Resources to Help Canadians Budget
Canada offers a variety of tools and resources to help you get started with budgeting:
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Bank Budgeting Apps:
Most Canadian banks, including RBC, TD, and CIBC, now offer free budgeting and tracking tools in their mobile apps. These make it easy to monitor spending.
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Government Financial Assistance Programs:
If you’re struggling, consider looking into government programs such as the Canada Child Benefit (CCB) or the Guaranteed Income Supplement (GIS) to help stabilize your finances.
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Free Financial Counselling:
Organizations like Credit Canada offer free financial counselling to help you manage debt and create a budget plan.
Conclusion: Start Small and Build Confidence
The 80/20 rule makes budgeting simple, effective, and stress-free for Canadians of all ages. By focusing on just two categories—expenses and savings—you can gain control over your finances and start building toward your goals, even if you’re only saving a little bit each month.
Remember, budgeting is about progress, not perfection. Take it one step at a time, start with what you can, and watch how these small changes make a big impact on your financial future. You’ve got this!
