The Rules of Thrift: The 80 Percent Saving Rule

Saving is a skill. It’s a learned habit that needs constant work and attention to maintain at a level that’s healthy for your long-term retirement plan. Keeping an itemized list of expenses can be tedious and the upkeep can be difficult. In my experience, few can sustain such a level of detail – it’s impractical, especially as we move through our busy lives. We need a strategy that can be more automatic, that can become a part of your routine.

Implement the 80 percent rule.

This is my favorite saving “rule of thumb” because it prescribes saving before you begin to spend. Learn to live on 80 percent of your net take-home pay. When we spend first and try to save whatever is left, we inevitably run into months during which we spend 110 percent of our net take-home pay and sink deeper into debt. If we invert that and save 20% of our income before we begin paying bills and spending, we get richer. It can be that simple.

Unfortunately, it can’t always be this easy for everyone. If you’re living paycheck-to-paycheck, saving this much might just be infeasible. In this case, I would still recommend saving before you start to spend, but chip-in only what you can. Maybe you can live on the 99 percent rule, and stash just one-percent of your income. The point is to get in the habit of saving.

The 80/20 ratio is also helpful to regulate your time and spending behaviors. Spend 80 percent of your week sticking to the strictest version of your spending plan – nothing superfluous, nothing unplanned. Then once the weekend comes, allow yourself a little leeway. That 20 percent of your time can be allowed for little spending indulgences – spring for that dessert, check out a new movie, buy that sweater you’ve been eyeing. Because you were disciplined for 80 percent of your week, you can spend a little more, guilt-free.

Don’t interpret the relaxed weekend spending as an excuse to go crazy. If you were on a diet, think of the weekends as your “cheat days.” You don’t want to derail your whole diet and gain back half the weight you lost in just two days. You want to give yourself a little room to breathe so that you can stay on track for the long-term. I’m no hardline disciplinarian; we all need modest indulgences, but we also need to keep our focus on our bigger plans and stay on track. These small spending allowances should have a low impact on your overall bottom line, but can have a big impact on your mindset and might have a significant net-positive on your long-term goals.

Strategies like these can help lead you to a healthy retirement, but what about once you’ve retired? The 80 percent rule can still apply. Common knowledge suggests that we live on 80 percent of our pre-retirement income during retirement. This can be easier than it sounds. While some costs, like healthcare, will predictably increase in retirement, many other costs are reduced, like home maintenance, costs associated with your children, transportation, and wardrobe. These costs might be difficult to quantify during your working years, but once they are “off the books,” living off of your 80% can become more manageable.

Stick to it. The 80 percent rule will be with you throughout your planning and your retirement. The 80/20 ratio is almost unavoidable. The quicker and more completely we’re able to adjust to this lifestyle and make saving a habit, the sturdier our retirement plan will be now, and in the long term. If you think you need help finding your way and adhering to the 80 percent rule, my Retirement Quiz can show you what good habits you already exhibit, while revealing areas of improvement.