The Pareto Principle — 80% of Your Results come from 20% of Your Effort

Peter Shi
Peter Shi
Aug 8, 2017 · 3 min read

A striking truth is that 80% of our results comes from 20% of our effort. Often, this figure is even less than 20%, such in the case of wealth distribution. For example, in 2016, 8 men controlled as much wealth as the bottom half of the world’s population.

This is called Pareto’s Law. From finances to relationships to career effectiveness, most of our best accomplishments come from a small number of actions that we take.

Pareto’s Law applies to the area of personal finance as well. I’ll list below a small list of principles that account of more than 80% of the content of the top personal finance books in the market today.

1. Spend less than you earn. Nearly all or all of the world’s money problems stem from people, businesses, organizations, and countries spending more than they have. The Housing Crisis of 2008 stemmed from people who could not afford houses taking out loans to purchase those houses. People who declare bankruptcy or are constantly having money troubles buy things they can’t afford to impress people they don’t care about. Everywhere you look, overspending ruins the lives of individuals and nations alike.

Write down how much you make every month. Subtract all fixed costs, including taxes, housing, food, utilities, and transportation. Estimate some of these fixed costs if necessary. What you are left with is money that you can save, invest, and spend. If you want to be wealthy, maximize this number.

2. Aim to be wealthy, not rich. Money is the medium to buy access to opportunity. If you were stuck on a desert island with no access to water, even a billion dollars would not save you from thirst. Being wealthy means having the opportunity to not only cover your basic needs, but also splurge on things you want, as well as have the health and time to enjoy those things.

Also, wealthy has a social component to it as well. By definition, money is a medium of exchange, so without other people to exchange goods and services with or donate money to, it is no good to anyone. Always remember why money was invented in the first place: as a medium of exchange for goods and services.

3. Save to Invest, Not to Save. Save as much of your money as you can (at least 10%, but I aim for 50+%) so that you can invest in items that can increase in value over time (an asset), preserve those assets, or grow your ability to save more money. Don’t save to put it all in a low-yield savings account or, even worse, under your couch, since inflation will result in you losing your hard-earned cash.

Examples of assets that increase over time include stocks, bonds, real estate in growing markets, and personal businesses. Examples of assets that do not increase over time include most new cars, real estate in stale markets, and yachts. When it comes to stocks and bonds, either diversity risk by purchasing ETFs or mutual funds with low expense ratios, or invest in what you know, such as stocks in companies that you regularly use and in the sector that you are currently in. This gives you a competitive advantage over other investors.

Examples of items that preserve assets include legal documents such as trusts and wills, as well as types of insurance that cover a broad range of scenarios, including health, home, dental, disability, and car insurance. Examples of items that preserve assets in a small number of scenarios, but are not worth it include insurance for a plane ride or a iPod charger.

Examples of items that grow your ability to save more money include education and learning, such as books, online classes, some college and graduate school programs (always look at ROI of the degree, major, and program, as well as your long-term interest in the subject).

As you apply the Pareto Principle to your own life, think about the 20% of activities that you do that bring 80% or more of your results. Then, do more of that 20%.

For example, I’m hoping that this blog will bring in 80% or more of my income much later than the line (one can dream, right?). Thus, I’m spending more time on writing, editing, and marketing my blog.

Pareto’s Law is simple in principle, and more challenging in practice, like many things in life.

See the original post at https://www.onepercentbettereveryday.com/money/2017/5/25/80-of-your-results-come-from-20-of-the-effort

Peter Shi

Written by

Peter Shi

Investor/Entrepreneur/Data Scientist; Blogger at www.onepercentbettereveryday.com; Connect with me on LinkedIn: https://www.linkedin.com/in/peter-shi/