The 80/20 Principle is a simple law that says, 80% of the results come from 20% of the effort. In other words, 80% of your time is wasted on achieving only 20% of the results. In other other words, we waste a lot of our time doing busy work to avoid what really matters.
The 80/20 Rule through a Personal Finance Lens
The purpose of this post was looking at ways to apply the 80/20 rule to improve your finances. Specifically, I want to maximize the following equation:
Results (Earn More, Spend Less)
For example, if you took one hour to cancel monthly subscriptions to save $100 a month, your output is $100 an hour. Or, if you took 2 hours to sign up for a new investment account that saves you $250 in fees, that’s worth $125 an hour. In contrast, if you cut coupons for an hour to save $12, your output is $12 an hour. I don’t know about you, but I like doing what earns me over $100 an hour. Let’s look at 27 ways to apply the 80/20 Rule to your personal finances that will get you closer or even above that $100 output.
The 80/20 Rule and Your Investments
- Control what you can control (fees, taxes, and asset allocation) Let the rest go.
- Use a buy and hold strategy.
- Max out tax advantaged accounts like 401(k)s and IRAs before doing any investing in a brokerage account.
- Don’t watch or read investment news. It won’t improve your investments.
- Automate your investments. Invest in your 401(k) with an automatic payroll deduction. Schedule a withdrawal from your savings account to your Roth IRA once a month.
- Invest up to the employer match in your 401(k). It’s the best returning investment there is.
The 80/20 Rule and Saving
- Make a list of 20 ways you can save. Implement only the 4 that will produce the most results.
- Cut monthly expenses by focusing on one monthly category. For example, don’t set a goal to save 10% this month. Set a goal to decrease your eating out expenses by 25% this month.
- Eliminate monthly subscriptions.
- Make small changes to your environment.
- Never carry a balance on your credit card.
- Never insure anything you can insure yourself (Computers, TVs, PS3). Get insurance for everything else. (car, life, disability, health, engagement ring)
- Pay your debt first. Schedule an automatic payment, above the minimum due, on high interest debt.
- Choose a bank that has no fees.
- Once you get your monthly expenses down, stop spending time on saving a few more dollars a month. Instead, spend your energy on earning more.
The 80/20 Rule and Earning More
- Make a list of 20 ways you can earn more. Implement only the 4 that will produce the greatest results.
- Ask for a raise.
- If you can’t get a raise, interview with a company that will give you one.
- Outsource 80% of time wasting tasks, so you can concentrate on the 20% that makes money.
- If you’re a freelancer or salesperson, profile the 20% of clients that produce 80% of your income. From now only, only accept 20% clients. Yes, that means turning away 80% clients.
- Set a time limit and a goal for each task. A time limit and desired outcome forces you to think about what’s truly important.
- Remember that the ratio of income to time is what’s important. If you’re tracking anything else, why?
The 80/20 Rule and Money Management
- Know what expenses fulfill you. Eliminate the rest. If you don’t know what fulfills, look at your last 100 expenses. Now, select which 20 you got the most fulfillment out of. The goal is to duplicate those 20.
- Hire an hourly CERTIFIED FINANCIAL PLANNER® to help you with the big financial decisions, such as buying a house. An hour of a CFP®’s time costs a few hundred dollars but can save your thousands.
- Use Mint. Take 30 minutes a month to categorize and review your expenses.
- To avoid fees, use automatic bill pay.
- Identify the 20% of information you consume that produces 80% of the results. Eliminate everything else.
How can you apply the 80/20 Rule to improve your finances?