Steadfast FinancesPareto Principle

Pareto Principle and the Power of Scale and Time on Your Finances

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Pareto’s Principle is one of the most helpful economic concepts for everyday finances. Sometimes called the 80/20 rule, it goes like this: 80% of the effects come from 20% of the causes. Ok, it’s a little cryptic, but the idea is very powerful; especially when you consider the impact of scale and time on your personal finances.

What is the Pareto Principle?

Think of all your expenses. The odds are that the largest 20% of your expenses make up 80% of your total expenses. How about the places you drive your car to? It is likely that 80% of your miles are spent driving to 20% of your destinations. Looking at your cell phone bill you are likely to find that 80% of your minutes are used to talk to 20% of the people you call.

Of course, things rarely work out to exactly 80/20, but the overall concept behind efficient use of your time is worth noting, especially in the case of earning/saving money.

Pareto Principle: Scale Matters

Of all the time you could spend earning/saving money in a year, the Pareto Principle suggests that 80% of it would be earned from just 20% of the time you work. It also means that 80% of our time is spent making only 20% of our income/savings. With that kind of wasted time, you have to wonder if you can spend your time more efficiently by ignoring the small things.

If you wanted to cut your budget down, you’d find that (on average) 65% of expenses are created by just three bills: housing, transportation, food. It’s undeniable that if big cuts to these expenses can be achieved, it will have huge effects on decreasing your spending. The Pareto Principle is all about making maximum impact by using scale to your advantage, but scale is only one half of the equation.

Pareto Principle: Time Matters Too

The Pareto Principle isn’t about forsaking all small things to focus on large things, because there is another part of the equation. Focusing on scale is usually all about the “causes” side of the Pareto Principle. However, the concept also includes effort. When it comes to making money, effort is usually measured in time.

It’s important to grasp both ideas because small amounts of money are often earned by spending small amounts of time accomplishing something. It takes nearly no effort to earn a little interest in a savings account, but it could require hundreds of work hours to earn a promotion at your job. The promotion might be more money, but earning money in a savings account is effortless.

The Pareto Principle tells us to take advantage of time and effort. Focus on a few big things for maximum impact. Don’t spend a lot of time working on little things, but most importantly don’t ignore little things that are nearly effortless.Pareto’s Principle is one of the most helpful economic concepts for everyday finances. Sometimes called the 80/20 rule, it goes like this: 80% of the effects come from 20% of the causes. Ok, it’s a little cryptic, but the idea is very powerful; especially when you consider the impact of scale and time on your personal finances.

What is the Pareto Principle?

Think of all your expenses. The odds are that the largest 20% of your expenses make up 80% of your total expenses. How about the places you drive your car to? It is likely that 80% of your miles are spent driving to 20% of your destinations. Looking at your cell phone bill you are likely to find that 80% of your minutes are used to talk to 20% of the people you call.

Of course, things rarely work out to exactly 80/20, but the overall concept behind efficient use of your time is worth noting, especially in the case of earning/saving money.

Pareto Principle: Scale Matters

Of all the time you could spend earning/saving money in a year, the Pareto Principle suggests that 80% of it would be earned from just 20% of the time you work. It also means that 80% of our time is spent making only 20% of our income/savings. With that kind of wasted time, you have to wonder if you can spend your time more efficiently by ignoring the small things.

If you wanted to cut your budget down, you’d find that (on average) 65% of expenses are created by just three bills: housing, transportation, food. It’s undeniable that if big cuts to these expenses can be achieved, it will have huge effects on decreasing your spending. The Pareto Principle is all about making maximum impact by using scale to your advantage, but scale is only one half of the equation.

Pareto Principle: Time Matters Too

The Pareto Principle isn’t about forsaking all small things to focus on large things, because there is another part of the equation. Focusing on scale is usually all about the “causes” side of the Pareto Principle. However, the concept also includes effort. When it comes to making money, effort is usually measured in time.

It’s important to grasp both ideas because small amounts of money are often earned by spending small amounts of time accomplishing something. It takes nearly no effort to earn a little interest in a savings account, but it could require hundreds of work hours to earn a promotion at your job. The promotion might be more money, but earning money in a savings account is effortless.

The Pareto Principle tells us to take advantage of time and effort. Focus on a few big things for maximum impact. Don’t spend a lot of time working on little things, but most importantly don’t ignore little things that are nearly effortless.

Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to multiple income. The intricate world of family finance unlocked, one post at a time.

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Posted by Shaun   @   5 April 2012 0 comments
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