On a general note, the 80/20 rule is an astonishing theory. You can apply it to your life in terms of diet, finance management, time management, relationships, and some other aspects of your life.
This rule is also known as the Pareto rule and this theory suggests that the application of 20 percent of inputs can fetch 80 percent of output.
The above percentages might surprise you, but there are some logic and science behind the rule. In this article, we will discuss the 80/20 rule in detail and we will understand how it can be beneficial in our life.
Origins of the Pareto Principle (80/20 rule)
The 80/20 rule, or the Pareto Principle, was a theory applied by Vilfredo Pareto. This Italian economist illustrated that 80 percent of Italy’s wealth was in the hands of only 20 percent of the population.
It was fascinating primarily because he used the analogy of 20% of plants reproducing into 80% peas.
What is the 80/20 Rule?
In terms of finances, the 80/20 rule says that 20 percent of your income should be saved, and still you are free to use the other 80 percent of your take-home income.
This is a simple implication that first, you will pay yourself 20 percent of the total income for your future self.
The 80/20 rule can be broken into a 50/30/20 rule too. In this, 20 percent of savings remain the same, but 50 percent goes to expenses on needs, and 30 percent goes to expenses on wants.
How is the 80/20 Rule Profitable in Life?
Savings and Emergency funds: Imagine a day when you are in need of funds, but you’ve spent every last penny from your income or you have a very little amount only.
Financially good days are all that we wish for you, but it won’t be every day. An emergency fund you save for your future will help you in case of need for funds in the future.
Easy-to-do: The rule is easy and very simple to apply and anyone can apply it in life without any technical knowledge and without s much effort. This means you can start budgeting and be accountable right now whether you have good knowledge of finance or not.
Automatic Good Habit: In starting may be a little difficult, but when you will start applying it and be committed to yourself, it will work. You know the amount you earn and what amount you want to save for your future but this rule may make your work easy. In the same way, it may also help you in your relationship also.
Applying the 80/20 rule in these 4 Areas of Life
Although the 80/20 rule is majorly used in businesses and budgeting, it can also be applied to any other aspect of life. Let’s understand its role in 4 major areas of life.
According to this rule, 80 percent of revenue in businesses is generated by putting only 20 percent of inputs. As a business owner, the first instinct of anyone would be to prioritize and make perfect everything within the business cycle.
This is where applying the 80/20 rule would help you to optimize your profit with as little as 20 percent effort. It doesn’t mean that 80% of efforts are useless and you should cut off. You just need to understand the principle that how you can optimize it.
For businesses, the 80/20 rule implies identifying the inputs that have more efficiency value. This is to say that businesses should focus on customers or departments that increase revenue instead of equal focus everywhere.
Focus on each department is important to run a business smoothly and well but you need to understand how much attention you need to put into each department.
2- Time Management
The 80/20 rule may be very useful for time management. If you understand this, you’ve resolved half of your issues. Time management is important for literally everyone whether you are a business person, a student, a professional, or even a housewife.
It is proven many times that if you study for a few hours without distractions and with full concentration, you are doing better than the one who is studying all day full of distractions. If you put 20 percent effort into a priority task, you can get 80 percent results.
If you apply, the 80/20 rule for your time management, you might see good results in multiple domains in your life.
Let us assume that two people work at the same office. They both leave the office at different times. On the one hand, Jake leaves early to spend the rest of the day with his family, while James leaves a little later. Whose family do you think would be more satisfied?
You would be surprised to know that James’ family is more satisfied even if he leaves his workplace late and is only able to spend 4 hours with his family. After work, he isolates himself and only spends time with his family, whereas Jake, who has more time, spends comparatively lesser time with family and more on distractions.
Even though James works more and is only able to give 20 percent of his attention to his family, he does it with full devotion.
4- Diet Plans
Teresa Cutter, a nutritionist, is also the author of the book ‘The 80/20 Diet.’ Basically, the book details how eating a less healthy diet 20 percent of the time still leads to weight loss and is actually a balanced diet.
It just means that you are not giving up anything in the process of getting fit. Creating this rule in your diet will also help you maintain the diet plan for a longer duration because you would feel mentally fulfilled with the food you are consuming.
Misinterpretations of the 80/20 Rule
There are a lot of times when people get too technical with the 80/20 rule. The rule is just a precept, meaning that the percentages of 80 and 20 don’t equal 100. Rather, they are just percentages of the total of whatever aspect the rule applies to.
The inputs and outputs are just different items that are applied in the context.
Questions have also been raised that the 80/20 rule skews the importance towards only some inputs while invalidating others. People think that only 20 percent of more efficient input is important and the other 80 percent isn’t. But the simple fact is that all inputs are important.
Is the 80/20 a Hard and Fast Rule?
Most of the time, the 80/20 rule is just a starting point. Once the rule is applied at the starting point, the effects that come because of it change the scenario. Now, you get to have more freedom in the percentages you apply to the rule.
Especially in finances and budgeting, saving 20 percent is a minimum requirement. After that, the more you save, the better it is for you. So the rule can be transformed from 80/20 to 60/40 or more. You can set the percentage according to your choice and the scenario of your life.
You might find more benefits in saving because as you grow older, your needs will require more finances that can be sourced from savings instead of income itself.
Consider an Instance
Let’s assume that a student studying in college has been assigned a task for her assessment. The task is to save every day and budget her finances. The end goal is to save enough money to be able to buy one luxury item at the end of the semester.
The student, Karen followed all the things she had been taught about budgeting in her personal finance class. She applied the 80/20 rule here and let’s see what happens.
Initially, Karen was able to save 20 percent of her expenses every day. She kept this sum of money aside. She kept on spending the other 80 percent of her money.
Within 15 days of saving, she had a financial emergency. She wanted to buy a limited series collectible that was selling for the last time. Production of that item would stop after this sale, and she would never be able to buy it.
This sure was an emergency for her. Thus, she spent all her savings for 15 days.
At this crucial point, she realized she would be poorly marked because her savings wouldn’t be enough at the end of the semester.
Karen decided to change her strategy. She started saving 50 percent of her daily inflow. Some days, when she needed to use only 30 percent of her income, she would end up saving 70 percent.
Karen was sure she would have enough savings now, and she was right.
At the end of the semester, all the students were happy with the amount they had saved. Most of the students even bought luxury items. But Karen didn’t.
It is fun to see how the rule is so flexible and easy to use simultaneously. It isn’t just applicable to finances but also to other aspects of life. You can achieve successful results in business, relationships, work life, etc.
The reward of the principle is that things can be achieved with minimal effort or input. We only need to know which input to use more proactively.
The distribution of anything is not equal or fair in every case. There would always be someone who has more or different. Considering this, Pareto had come up with this principle. But as we can see, this unfair distribution can also be beneficial and helpful.
It is clear that the rule can be applied anywhere you want to apply it. Especially in terms of finance, the rule has been in use for a long time. It is a prominent tool for budgeting and saving money. Spend most on what you need, a little lesser on what you want, and the rest on savings.
It indirectly would either make you richer at the moment, help you in the future in times of dire need, or can act as investment money.