The Pareto Principle, also called the 80/20 principle, can be achieved with 20% of our dedication and commitment. It shows that our goals and this logic can be inserted in any aspect of our lives. That includes personal fulfillment, professional success, physical conditioning, and so on. Pareto believed that we should reduce our focus on different sectors of our daily routine, reinforcing only what can trigger a major benefit. In his view, people should focus on actions and projects that really matter.
How to Use the Pareto Principle to Improve Your Finances
Are you unable to manage your salary, and are on reaching “bankrupt” by the middle of the month? The simple solution is to group your spending by categories such as housing rent, water, electricity, internet, gas, transportation, food, leisure, clothing, etc. If not those, create categories more suited to your lifestyle. Then, examine which categories represent the 20% that most consumes your income. Thus, you can see if it is possible to enhance or reduce some of your expenses.
Household Expenses
Start with making a chart that shows a rough approximation of your categorized household expenses in percentages. To follow this, you can also set up a budget and list out the most expensive category to the least expensive. Preferably make it in dollars or use percentages. You can also group them in different categories.
Personal Capital
Personal Capital is an online tool, which will help you visualize your expenses automatically. If you are disciplined about budgeting, you can create a similar graph based on your budget categories. Unlike typical budget numbers, this graph must be organized from the highest to the lowest category.
What the Pareto Principle Rule Reveals About Your Finances
The 80/20 Rule is a great tool that can be applied to anything if you haven’t considered it before. You can try using it on your budget and see if it can improve your finances using the Pareto Principle. Create a graph, which shows that 80% of your expenses are in just six categories. These are the six categories where you want to start making adjustments to improve your finances.
Mortgages
Is there any opportunity to reduce my mortgage payments, maybe by refinancing my mortgage? What about downsizing? In general, you can keep your total home-related expenses under 25%, so make some improvements here.
Taxes
This is the biggest category where the Pareto Principle must be applied to improve your finances. However, this may not show up in your budget because most people start with their take-home pay. They do not include deductions and withholdings in their budget. If you are self-employed and own your businesses, your budget keeps track of gross income and shows taxes.
Retirement Savings
Technically, saving for retirement is not an expense, and it is kept aside to improve your finances. But it is recommended that you keep track of this in your budget. Moreover, you can see what percentage of your income goes toward retirement savings. The recommended amount is 15% of your gross income, and you have some room to improve here.
Home Improvements
This may be a rough year with several incidents that necessitate HVAC replacement, roof replacement, and re-flooring. However, a lot of the expenses in this category are a one-time thing. And this will go back down to the average level for the foreseeable future.
Child Related
Your child attends public school for free, but there are several extracurricular activities in which they might be involved. Maybe the time has come to spend less on these activities. Evaluate and see if there are any unnecessary expenses you can cut here.
