The 80/20 rule may sound a bit cliché to you. The rule—also known as Pareto’s Principle—was named after an Italian economist Vilfredo Pareto. In 1900’s, Pareto realised that 80% of Italy was actually owned by 20% of the population. This principle was carried through generations and has become a common thought applied by everyone.
Pareto’s Principle has become a working pattern for people comfortable with the idea of having priorities. In terms of applying the said principle to your personal life, it could be reflect something like this: that 80% of whatever you’ve accomplished is the 20%-output of your hard work. That’s for your personal life. But how about your personal finances? Can you apply the same idea to your budget?
Budget: 80% Needs, 20% Savings
Watching over your budget is crucial. How can you apply the 80/20 in your daily budget, for instance?
- Every time you spend, try to check if you could slash down the cost for each item or service you get. The famous Pareto Principle already gives you the figures you need to work with: 80% needs and 20% savings.
- A big part of your income doesn’t really go straight into your savings. You have basic needs to attend to plus bills, and other expenses. What you can do now is try to get the best of both worlds. Buy and save. Look at how much you spend first. Make that your 80% and treat whatever remains as the 20% you need to set aside for your savings.
- The fate of the remaining 20% will depend on how responsible you are as a spender. If you’re responsible, that 20% will find its way into your savings fund. If you’re not, that 20% will disappear from your wallet sooner or later and turn into a fond memory.
If you’re a young professional and have just started working, don’t overspend. Try. It’s often harder for young professionals to save because all they want to do is spend their money. If you’re one, you should try harder to save. Don’t let sales and discount offers tempt you. Don’t get a mobile phone contract, use prepaid if you can. Don’t use credit card, use cash. Break down all your expenses even further if you want to get 20% of your money into a savings account.
Decision-making: 80% Result, 20% Decision
Your smartphone crashed while you were on the hunt for a new job. You might not have enough money to get a new mobile phone. But you still wanted a shiny, new smartphone, and you got one under a two-year contract plan. It came with a big monthly fee. The plan included a lot of freebies plus consumable amounts of stuff you really didn’t need anyway. A few days after, you got hired. But the company banned the use of mobile phones at work. That meant you wouldn’t get to maximise the use of your nifty gadget at all. Even though it cost you an arm and a leg.
How does the 80/20 apply here? The figures, more or less, reflect the time you should spend on thinking about a decision—of weighing every factor—before you settle on a choice. If 20% of a decision is built on thinking-time, then the remaining 80% is time probably spent on dealing with the unfavourable consequences of that decision—simply because you failed to think things through before you settled on a decision.
Extra Income: 80% Effort, 20% Time
If you work eight hours every day and you’re still not happy with what you’re earning, then you can apply the 80/20 formula. The willingness to earn means sacrificing other things like time. The more time you are willing to dedicate yourself to work, the higher your chances are of earning extra.
- Estimate the remaining time out of your regular eight hours and see if you have enough to accommodate a possible side job. That may include weekends.
- Figure out skills and match them to your possible ventures.
- Make sure that your side job won’t affect your regular job.
Since online shops are really popular nowadays, maybe you could try that out. It would be more convenient because you can work right in the comfort of your home. With an online shop, you could sell a variety of items, old or brand new. For example, if you’re no longer interested with your vintage items at home, you could sell them all. There’s a large market for vintage items.
The ancient formula might not work on your personal finances. Simply because people work on different levels and have different needs and spending habits.
But if you think the 80-20 money saving formula is effective and that applying it to you own finances is going to work wonders for your financial resources, go ahead.
What the Pareto Principle tries to convey is that small efforts could lead to big payoffs. It’s the same with your personal finances: small amounts that you usually ignore could eventually grow into a huge happy fund for you—if you just have the dedication and patience to follow through with saving.
Photo Credit: Flickr/kleuske