What is the 80/20 principle?
The 80/20 principle is about streamlining your life and maximising your success. It’s the science of getting the most value out of everything you do with the least amount of effort.
The 80/20 principle – or the Pareto Principle – is a concept attributed to Italian economist, Vilfredo Pareto, who in 1896 noticed that 80% of the land in Italy was owned by 20% of the population. His interest piqued, he surveyed other countries and found the allocation to be the same, which led him to develop this now famous aphorism.
“In simple terms, the 80/20 principle states that 80% of all output comes from 20% of the input.”
What does this mean?
It means that if you run a business, its quite likely that 80% of your revenue comes from 20% of your clients.
It means that if you are a student then 80% of your knowledge base will probably come from 20% of your lectures.
It means that 80% of the world’s money is earned by 20% of its population.
Although not a hard and fast mathematical rule, the 80/20 principle is perfect for those who need to financially ‘de-clutter’ and cut out dead weight – be it stocks and shares, or unhelpful money habits.
So how can the 80/20 principle improve my finances?
You need to start looking at this principle as an input/output meter to help you gauge the best way to manage your finances.
Your saving rules
Following this concept, 80% of your savings will come from 20% of your savings rules. Therefore, look at your current savings rules and see which of them are saving you the most money.
Then, instead of adding more saving rules that will take more effort to manage and therefore be less efficient, concentrate on improving the 20% that are making you the most money. Find a way to streamline them - such as by upping your contributions or automating your savings - to maximise your outputs (ie. your savings).
Your spending habits
Identify what it is in your life that is really making you happy. Do you really need to say yes to every single social event? Must you be a member of every streaming site, or subscribe to every magazine?
Take time to take stock and you will most likely come to the conclusion that 80% of your joy is derived from roughly 20% of your activities. Identify what it is in your life that really brings you joy and maximise your time doing those things. Conversely, minimise the time, effort, and money attributed to the others.
Following the principle - 80% of your profits will come from 20% of your investments. On the (worrying) flip side this can also mean that 80% of your losses could come from 20% of your investments. This means you need to take the time to really understand your risk profile and take time once a year to re-balance your assets accordingly.
Furthermore, you should have a thorough analysis of all our investments and see which of your stocks have performed well historically and drop those that are proving to be dead weights.
Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.