When it comes to money management, you’ll encounter a lot of recommendations regarding the right technique to use.
Some people swear by the traditional monthly budget laid out on a spreadsheet, while others advocate for the 50-20-30 budget. Still, many people find that it’s not their cup of tea and would rather explore other options.
If you’re one of those people, then maybe you’d want to learn about the 80/20 rule in managing your money. It’s not only used for finance—it can be applied in a lot of other aspects in your life.
Read on to learn more about the 80/20 rule and how it can help you in your personal finance journey.
What is the 80/20 rule?
Also known as the Pareto Principle, the 80/20 rule states that 80% of the effects come from 20% of the causes.
For instance, if you’re a business owner, 80% of your sales come from only 20% of your customers. Your biggest client—even if they’re few in number—are responsible for most of your sales.
Look at your closet, and you’ll notice that you wear 20% of your clothes 80% of the time.
And even on a global scale, you’ll find that 80% of the world’s GDP comes from the richest 20% of the population.
Basically, the 80/20 rule implies that a little effort goes a long way. Even if you put in only 20% of your efforts in one goal, you’ll still reap 80% of the benefits. Of course, you can always do more, but this is a good start.
How can you apply the 80/20 rule to manage your finances?
The 80/20 rule applies to many situations in your life, including personal finance. Here are some ways that you can use this principle to help boost your investments and cash flow:
- Focus on one paycheck at a time.
While investing in real estate here in the Philippines can be a good long-term plan, the prospect of saving up lots of money for that financial goal can seem daunting and insurmountable.
But if you keep a certain amount each paycheck—say 20% each cutoff—and allot it toward your house or condo unit, you’ll eventually be able to pay it off in the long run.
That’s not a lot of effort compared to saving in lump sums, yet you’ll still be able to achieve your goal.
- Automate your investments.
Investing in autopilot allows you to contribute cash to your investments without fail.
Setting up automatic investment plans take only a small, one-time effort, but it’s enough to help you build your wealth from the ground up and reap lasting rewards.
- Examine your biggest expenses and find a way to cut them.
Most people would advise you to cut back on your coffee and fast consumption to save money, but that’s just 20% of your budget. You need to target your biggest expenses—the ones that make up 80% of your monthly bills—to make a lasting change in your finances.
For example, if you’re spending a lot on rent, try to find a roommate to cut it in half. If you’re paying multiple credit cards every month, consolidate everything in one card to lower the interest rate that makes such a huge dent on your monthly cash flow.
Managing your money is not the easiest thing to do, especially when you’re saving up for a big purchase, like your own Avida house and lot. But with the 80/20 rule, it becomes less intimidating and more doable as it only requires a little effort on your part to receive more in return.