Financial Balance and the 80/20 Rule

One of the most fascinating things I’ve discovered since starting The Simple Dollar is the 80/20 rule, also known as the Pareto principle. Simply put, it means that 80% of the effects comes from 20% of the causes.

It’s perhaps easiest to explain this principle by giving you several examples of how I see it popping up again and again in my life – and how I use my understanding of it to my advantage.

80% of our total grocery bill comes from 20% of the items. This is actually true. If I take a typical grocery receipt and count only the top 20% of items in terms of cost, those items will make up close to 80% of our grocery bill.

Thus, if I want to save money on my grocery bills, I need to address those items instead of the staples. Is this expensive item really the best bang for the buck here?

You don’t save a whole lot of money by fretting over the items that cost less than a dollar. You save money by not buying (or finding a less-expensive equivalent to) the ten dollar items.

80% of my clothes-wearing is done by 20% of my clothes. I usually rotate about five pairs of pants and about eight shirts all the time until something wears out. If I actually look through my clothes, I own substantially more shirts and more pants than that.

So why buy them? Why own them? Eight shirts and five pants gives me forty outfits – and more if I combine some of the shirts together into a layered look.

Simply put, I don’t buy new clothes unless they’re on sale or at a thrift store, period. If I do pick up new clothes, they will simply wait to go into the normal clothes rotation until another item wears out.

80% of my time in my home is spent in 20% of the space. Think about it. How much time is spent in your bed? How much time is spent in your favorite chair? For most of us, that eats up the vast majority of time they’re in their living quarters.

I spend most of my time in my home either at my desk in my office, in my bed asleep, or in the family room. I spend very little time in the rest of the house.

The only reason to have a large home is so that you have room to store lots of stuff.

80% of my entertainment enjoyment comes from 20% of my collection. I tend to re-read my favorite books, re-listen to my favorite albums, and re-watch my favorite television shows and movies fairly regularly. I’d far rather watch the run of Freaks and Geeks again than a new episode of most of the things currently on television. When I’m listening to music, I’m much more likely to throw on an old Pearl Jam CD than anything new.

This realization has moved me towards trying to find free or very inexpensive ways to expose myself to new media. I use the library. I watch free samples online. I read free sample chapters of books I’m interested in.

This way, I’m not actually investing my money into something that doesn’t click deeply with me.

To put it simply, the reality of my behavior leads me to frugality. I just have to sit down, look at what I’m actually doing, and make sensible financial choices accordingly.

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  1. Des says:

    I have always found this principle to be less than helpful. For example, while it is true that 20% of my outfits are worn 80% of the time, I still need to have special occasion wear available (something nice enough for weddings) and something to wear during the one month a year it is hot in my climate.

    I may spend 80% of my time at home split between my bedroom and living room, but that doesn’t mean I don’t need a bathroom.

    80% of my productivity (and enjoyment) at work comes from the 20% of my time I spend actually coding (I’m a programmer), but that doesn’t mean I can drop the documentation and presentation aspects of my job.

    etc…

  2. Thomas says:

    80% of my work time is taken up by 20% of my clients. 80% of my clients only take up 20% of my time.

    I sure wish I knew where my clients would fall, either in the 80% or 20%, before they knew my price.

  3. Andrew says:

    Des, I think you’re finding the principle less then helpful because of your interpretation to focus on the important 20% and try and literally eliminate the rest.

    If I spend 80% of my time/attention/money/etc. on one aspect of my life, the competing aspects still get the remaining 20%, not 0%. If I spend 80% of my time in the living room or bedroom I still need a bathroom, it just may be simply furnished and basic compared to the comfort and expense put into my living room.

  4. Tracy says:

    I really wish I could figure out why some things go into moderation and some don’t, since they’re NEVER RELEASED.

    I’m going to try separating this out into sections.

    First, addressing the article:

    I’m not sure how useful it is in terms of frugality. 80% of your grocery bill may account for 20% of your items, but unless you identify what those items are and why they aren’t necessary, it’s just data.

    And you say 80% of your clothing wearing is 20% of your item and your answer is to buy at thrift stores. But isn’t the real issue how much clothing you own that isn’t worn and the answer is to go through your closet and identify what is actually not worth keeping and selling/giving it away? Because just buying more clothes you won’t wear at thrift stores still doesn’t make sense.

  5. Tracy says:

    Hhaha, it seems like Trent’s moderation tool automatically moderates anybody explaining to him that that’s now how you correctly use ‘simply put’

  6. valleycat1 says:

    Does this still apply if you take care of the extraneous stuff? How do you keep paring back? Say, in terms of Trent’s grocery example. The rule doesn’t say anything about it going away at some point.

  7. Courtney20 says:

    “The only reason to have a large home is so that you have room to store lots of stuff.”

    Snort.

    People can have large homes because they have large families (more bedrooms/bathrooms), like to entertain (more dining room/den space), like to have out-of-town visitors often (again more bedrooms), like to have space for hobbies and other activities (game room, library), work from home (office), etc etc. Fer cryin’ out loud, it’s not always about more Stuff.

  8. Tracy says:

    Heck, Trent doesn’t even think his home needs a kitchen!

  9. Ryan says:

    Agree with Courtney20. Especially in the midwest, where a few hundred thousand dollars can get someone with a small family a (in comparison) very large house.

    A few/a lot of my classmates grew up in extremely large houses for our school district – greater than 3500 sq. ft for a family of maybe 5. I would say that few of them had ridiculous amounts of of stuff. Mostly the same stuff I had (in a nice 2300 sq. ft. house), but maybe “nicer versions”?

  10. moom says:

    About 80% of the citations to my academic papers are to the top 30% or so of them. So it’s roughly right there.

  11. And related to this is the fact that if we are going to overhaul something in our lives (finances, diet, wardrobe), just revamping 20% of the system will lead to 80% of the outcome–and so that is really positive! Makes it seem easier to take on a change project.

  12. con says:

    I am getting a larger home (for no more money than I am spending now). I don’t want it for more stuff, but because I want it to look spacious with less stuff. That will make me feel way more peaceful. And I have a very small house at present.

  13. Kirstie says:

    Houses in the midwest may be cheap in monetary terms, but it costs more to heat/air condition a large house than it does a small house, never mind running all the extra TV’s, kitchen appliances, bathrooms etc. that larger houses seem to swallow.

    Even if you live in a country where most people can afford to heat their homes now, I think the 80/20 ratio is often quoted when describing the proportion of the earth’s natural resources used by the richest 20 percent of the population – this isn’t a sustainable situation. Just because you can make the monthly mortgage payments on a large house (and we have seen in recent years that many people clearly can’t), doesn’t make buying one a well thought out decision.

  14. getagrip says:

    If 20% of your spending is eating up 80% of your income, it pays to focus on reducing those big expenses first.

  15. I think people who struggle with 80/20 concepts often are being too literal or absolutist about it. It’s just a general rule of thumb, and sometimes the numbers aren’t exactly 80/20, or can’t really be estimated accurately.

    But the concept behind it just says that sometimes very small changes in what you buy, how you spend your time, etc., can have big impacts.

    In our home, we applied the 80/20 Rule once we found out that just one or two restaurant outings were costing us a huge percentage of our monthly food bill. Also, we use almost exactly 20% of our kitchen tools to make nearly all of the food we cook at home (in other words our kitchen items were more like 100/20 instead of 80/20), thinking about this helped us organize our kitchen better. As a result cooking at home became easier and less time-consuming.

    The concept is really useful if you think flexibly about how to apply it.

  16. Canan Onat says:

    Dan @Causal Kitchen: Thank You and ditto!

    That’s exactly how I interpret the Pareto Principle and have found it very useful especially in my professional life.

    It enabled me to eliminate some redtape in my organization just today.

  17. John says:

    If 80% of the effects come from 20% of the causes, what about 20% of those 20%?

    If the Pareto principle is true, 64% of the effects come from 4% of the causes. And 51.2% of effects come from .8% of the causes!

    In other words, I can get job half done by putting in less than 1% of the effort. Do you really believe that?

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