In finance, time is currency and every move shapes your wealth. This article will explore The 80/20 rule and how it relates to financial planning.  The 80/20 rule, also known as the Pareto Principle states that 80% of outcomes result from 20% of causes. It can be applied to identify the most significant factors impacting financial success.

What is the Pareto Principle?

The principle was developed by Italian economist Vilfredo Pareto in 1906. According to what Pareto observed, 80% of the land in Italy was owned by 20% of the population. After surveying other countries, he found the same to be true in every other place. For the most part, the Pareto Principle observes that things in life are not always distributed evenly. The Pareto Principle is a general reminder that the relationship between inputs and outputs is imbalanced. 

Points to Note: 

• The Pareto Principle posits that 80% of outcomes result from 20% of inputs.
• Originating from Italy’s unequal land ownership, it highlights inequality.
• It highlights the concept of minority ownership yielding majority results.
• It’s important to note that the Pareto Principle is an observation, not a rule.
• While widely applicable, it only fits some situations.

Relationship between Pareto Principle and Financial Planning?

The Pareto Principle reminds one of the popular Gen Z saying, “Life no balance”. However, you can balance your finances using this formula. Here is how:

• Identifying High-Impact Areas: In financial planning, the Pareto Principle suggests that roughly 20% of your efforts or expenses contribute to 80% of your financial outcomes. By identifying these high-impact areas, such as major expenses like housing, transportation, or debt payments, you can prioritize optimizing and managing them effectively.

• Budget Allocation: Applying the Pareto Principle to budgeting involves allocating a significant portion of your resources to the most critical areas that contribute the most to your financial goals. This might mean prioritizing essentials like housing, transportation, and debt repayment while being mindful of discretionary spending on items that contribute less to your long-term financial health. 
• Continuous Evaluation and Adjustment: As circumstances change, you may need to reassess your priorities and reallocate resources accordingly. By staying vigilant and adaptable, you can maintain financial health and optimize your resources for maximum impact.

In summary, allocate a high amount of your salary to high-impact areas of your life like food, transport, rent, and so on. While you save and invest the rest. 

The Pareto principle is a rule of thumb that stems from the observation that wealth is not evenly distributed, hence you can’t afford to allocate an equal amount of resources to all aspects of your financial life, instead, you allocate accordingly, prioritizing high-impact areas. Identify these areas and plan accordingly.