Pareto’s Law: The 80 / 20 Principle

Pareto’s Law, sometimes called the 80 / 20 principle, simply states that 80% of your results come from 20% of your efforts. It is a remarkably simple concept which reminds us to focus on the ‘low hanging fruit’, and not waste our time perfecting something ad infinitum.

Another way to think of the principle is that an 80% solution on time is better than a 100% solution that misses the deadline.

On the path to Financial Independence, we learn that our time is our most precious resource; our life energy. This is why we are so eager to ditch the 9-5 grind where we sell our time for such small amounts of money, and instead buy back our freedom using our investments in profitable assets.

If the focus is on buying back our time, why would we then waste so much of it perfecting something that is already at an 80% solution? In Academia is that not a distinction grade ?

I am accused at times of being ‘too hardcore’ when it comes to my finances. I am very deliberate with how I spent my time and my money, and this leads me usually to a savings (and investing) rate of over 80%.

I have pared down my bills, I live well below my means and I am very efficient, and becoming increasingly self-sufficient. I also invest smartly, in ultra diversified and low cost total stock market index fund ETFs and LICs. However, I don’t let finances stress me out.

I often hear about people worrying over finances, but honestly, if you are already at the 80% solution with your budget and investing, your honestly probably doing better than 99% of people out there. If your worrying about which of your investments in ETFs or LICs is the best, you are well past the 80% solution by the way!

Still, I hear people stressing over not just that final 20%, but the 5% and also the 1%ers. While I agree that a Millionaire is made $10 at a time, you should not let chasing these 1%ers detract from your happiness or etch away at your Mental health. Your time and worth is much more important.

I do find it fun maximizing my savings and creating a most efficient budget out there, but I’m not really going to stop using the airconditioner in my car in summer to save fuel. Similarly, I am not going to give up opportunities to socialise and network in the bar – ironically, often these ‘investments in social capital’ pay off big time, whether that be in your career or personal business adventures.

You should focus on the ‘big ticket’ expenses first, the areas where you are most wasteful. These often include;

  • Having too much house
  • Living in the wrong spot
  • Driving too much car
  • Having personal debt; credit cards, car loans or other personal loans
  • Paying too high of an interest rate on your mortgage
  • Not investing (or investing in dumb things like marijuana penny stocks)
  • Having ridiculous phone plans
  • Paying for way too much insurance: home contents, car, income protection etc

Only after you’ve addressed some of the common main problem areas that will provide you with your 80% solution and started easily plugging the holes in your leaking boat, should you then start tackling that remaining 20% – side-hustling like eBay selling to de-clutter, or flipping items.

Personally, I don’t even bother with the majority of 1%er things, because they just aren’t worth my time – which is the main commodity I am trying to buy back anyway! My list of 1%ers includes;

  • Paid surveys
  • Product testing
  • Scanning receipts
  • Credit card points
  • Flybys and travel programs
  • Shopping reward / loyalty schemes

What do you think?

CaptainFI

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