In 1906, an Italian economist named Vilfredo Pareto noticed that 80% of the peas in his garden came from only 20% of the pea pods. (You may have heard that most people wear 20% of their wardrobe 80% of the time.) Enter the Pareto Principle, often called the 80/20 Rule.
How does it apply to money? By becoming aware of this 80/20 ratio and how it works in your life, you can spend less, save more—and earn more.
- Spend less. You're probably spending at least 80% of your cash on just 20% of your basic expenditures (i.e. rent, groceries, utilities). Simply paring down the items in that 20% category could alter 80% of your spending. (Hint: Parkinson’s Law can help.)
- Save more. Now look at your spending on non-essentials. What if 20% of the "extras" you buy are yielding 80% of your satisfaction and fun? Identify the key 20%, then cut back other, less-rewarding expenditures (a.k.a., get more bang for your buck). Voila: Sudden savings.
- It’s Business, Not Personal. If 20% of your clients are bringing in 80% of your income—a common scenario—focus 80% your energy on those winners, and consider dropping those that bring in mere pennies. (Amanda also talked about wasted effort here.)