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The Pareto Principle – the 80/20 Rule

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Many of you may have already heard of the Pareto Principle, or the 80/20 rule. The rule was named after an Italian economist who noted that 80% of his country’s land was owned by 20% of the population. The 80/20 principle was later adapted by Quality Management pioneer Joseph Juran, who observed that 20% of your efforts result in 80% if your returns, and the remaining 80% of your efforts result in 20% of your returns. He surmised that if you focus on the 20% that gives you the greatest returns, you could eliminate a lot of waste and increase your productivity. The Pareto Principle can be applied to almost any aspect of life, including your career and your finances.

Applying the Pareto Principle to work

The office setting is full of wasteful activities – e-mail, meetings, unnecessary paperwork, etc. You may not be able to eliminate each redundant procedure because it may be company policy. But you may be able to find more effective methods of dealing with them, or you may make recommendations to the policy makers to make your job (and that of everyone else) easier. Here are some other ways you can increase your productivity:

Make a list and check it twice. The first thing I do when I arrive at work is sit down and create a list of the tasks I need to accomplish that day. If I am working on a long term project I try and break it down into bite size goals or milestone markers that I need to achieve by the end of the day or week. Once I make my list and boot my computer, I am ready to take 5 minutes to get a coffee and talk football with my coworkers. Then it’s off to the next big time sucker – e-mail.

E-mail productivity. I have worked in a few large organizations, and they all have one thing in common: the proclivity to send mass quantities of e-mail announcements. One large organization I worked for sent out an average of 10-15 of these announcements daily, while my current organization sends out about 5. To make my life easier, I created a folder for these announcements and a filter that automatically files them to that folder without it ever hitting my inbox. I check the folder once in the morning and once in the afternoon, and usually can delete 90% of them without ever opening them. The rest are rarely, if ever, time sensitive, so saving them for the end of the day is not a problem.

Another e-mail tip to save time and productivity is to never open, send, or forward chain mails and similar e-mails. Not only are they a huge time suck, but they use company resources and are probably against company policy.

Meetings. In my former job we called them “beatings” because they were long, painful, and usually useless. If you can’t get out of scheduled meetings, then find a way to be more productive, such as starting each meeting with an agenda and guiding the participants back toward the agenda if they stray off topic. You can also take notes or work on another task if possible. If none of those work, then visit this site for a timely text message to get you out. Just don’t try it too often. ;)

Applying the Pareto Principle to your finances

Manage your money effectively. Dealing with finances can be difficult under the best of circumstances, so it pays to streamline your processes as much as possible.This can include automating your finances, closing unnecessary accounts, and tracking your money.

Consolidate accounts. I recommend keeping the essential financial accounts, and closing the rest. That can include closing extra savings accounts, rolling over 401ks into an IRA, consolidating debt, and consolidating multiple retirement accounts. Just be aware that closing credit card accounts can affect your credit score.

Budget. You will have a more difficult time managing your money if you don’t know where it is coming from and where it is going. Create a simple budget and track your finances with something as simple as a pen and paper, a spreadsheet, or a dedicated software program. Here are some reviews of free online money management software programs, and some popular programs including You Need a Budget and Quicken 2010.

Automate your finances. Automating your finances reduces the amount of time you spend dealing with opening bill statements, writing checks, visiting websites, etc. Use your online bank or a credit to pay recurring bills such as your cell phone or cable, use online bill pay, and make automatic invstment contributions. You want to verify your transactions at the end of each month, but you don’t want to spend a lot of time tracking them down. Automating your finances saves you time and money.

Applying the Pareto Principle in your life

You can easily apply the Pareto Prinicple in other aspects of your career and finances, and you can certainly use these principles in other areas of your life as well. Go in with the mindset of achieving results and you will increase production. Start with the low hanging fruit, work toward the bigger processes, and practice continuous improvement methods such as Personal Finance Kaizen. I’d love to hear how you apply these principles at work or at home.


Published or updated February 24, 2010.
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{ 4 comments… read them below or add one }

1 Financial Samurai

It’s a great principle that I’ve used ever since high school. You can’t be all things to all people, so don’t try. Focus on what’s most important!

Hence, from a finance perspective, don’t sweat about saving $10 bucks a month on electricity and other small things. Focus on making an extra $1,000/month in income!

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2 Craig

Great idea and I like keeping things organized and as simple as possible. I am the same with work, always create to do list and cross things off as I go along. With finances I keep everything in my main accounts and organized. No reason to have stuff all over the place.

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3 Manshu

Great idea! I loved this post especially because I was talking 80/20 with a friend this week. Since I am going to get married soon, the subject was more than 80% of money getting spent on less than 20% of stuff for the wedding!

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4 Wojciech Kulicki

Pareto seems to pop up whenever I start writing about money! It’s just such a great rule for getting to the heart of what’s important. I can think of a few more money-related Pareto statements:

20% of your expenses account for 80% of the value you receive
20% of your budget accounts for 80% of your spending
20% of your investments create 80% of your returns (ehh…maybe)

It’s actually kind of fun to brainstorm these and see what shakes out…

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