The Pareto Principle


The Pareto Principle, also known as the 80/20 rule is a concept that states that: “In many situations, approximately 80% of the effects or results come from 20% of the causes or inputs.” This is a tried and true principle that can set your life up for success. We can apply this simple principle to any aspect of our life - including our finances, career, business, health, relationships, etc.

Understanding the 80/20 principle is essential to prioritising the “vital few” and ignoring the “trivial many” to have the greatest financial success. This way, you can identify and concentrate on the most significant things that can potentially achieve greater efficiency and productivity, and at the same time reduce your efforts on time-wasting and money-wasting actions. Here are two applications of the Pareto Principles as it relates to our personal finance.

1️⃣ Budgeting:

The 80/20 rule is a great starting point for those that don’t like to meticulously track expenses. It is a simplified version of the 50/30/20 budget rule where you allocate 50% of your income to needs, 30% toward wants, and 20% towards savings. You don’t have to break down your needs from your wants when you use the Pareto principle because they all fall into the 80% category. The remaining 20% of your income then goes directly to your savings. This strategy is a simple formula to follow to set up a successful budget.

2️⃣ Investing:

It is common to observe that a small percentage of assets or investments (as little as 20% holding) generate the majority of returns (as much as 80% growth). This is often referred to as the “vital few” that significantly impact the overall performance of the portfolio. The 80/20 rule focuses on the right allocation of assets and maintaining a balance between risk and return. Some ways in which you can implement the principle in your investments are: investing 80% of your money in passive index funds and the remaining 20% in real estate, or investing 80% of your funds in retirement accounts and the remaining 20% in high-yield securities, etc. Identifying and managing high-performing investments can be crucial for long-term financial growth.

It is important to note that the 80/20 rule is a precept, not a hard-and-fast mathematical law. It is the concept behind the rule that matters.

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Categories: Financial Planning
Oyenike Adetoye

About Nike

Oyenike Adetoye (aka Nike) is an impactful speaker, author and personal finance expert. A Chartered Management Accountant by profession. Nike is the founder and CEO of LifTED Finance, a private financial firm that educates, coaches and supports people on their journey through financial fitness and wealth management.