Although history has shown us that there are many practical applications for the 80-20 rule, it has rarely been used in the field of personal finance.
Yes, there is the concept that the richest 20% of the world’s population controls 80% of the world’s income. And yes, the original use of the 80-20 rule comes from the notion that 80% of the “results” come from 20% of the “efforts.”
However, the question is, how can the 80-20 rule be applied to personal finance? The basics of personal finance can be summarized with two verbs: spending and earning. How well you do each one of those activities determines your personal wealth.
The mind-set of many people when it comes to spending is rather disastrous. Their spending goals may be just to spend a little less than they earn to cover their monthly expenses. When they ask themselves if they can afford something, they usually do the simple math. Does my monthly income cover the amount of money this item will cost me? If the answer is yes, they give themselves permission to spend.
When considering the earning part of the equation, many think they are stuck with decisions they made for themselves when they were in their early 20’s. College and job-training plans were made then and hopefully carried out as well. However, in retrospect how many people really know what they want at that age? So people get trained for careers. Then get comfortable performing their jobs. It doesn’t take too long before buyer’s remorse sets in and they realize their choice of profession did not meet their needs.
The personal finance decisions they now make are mostly centered around budgeting and living within their means. Maybe 80% of their personal finance planning is spent doing this. How can I make my dollars stretch further? How can I enjoy life the most on what I have?
Maybe 20% of their personal finance attention is spent on increasing their earning potential. They may have these thoughts: How can they work harder to get the next job promotion? What will it take to impress the supervisor or boss? Would another job pay more money?
That type of split-thinking – 80% on budgeting and 20% on increasing income – is almost a boiling frog syndrome. You get used to living a certain way and it becomes comfortable. Before long you are slowly killing your drive.
What if you reversed the equation? Let’s say that you spent 20% of your personal-finance planning and thinking time being budget conscious, spending when necessary and covering your monthly bills. Then spending 80% of your time thinking of additional ways you can earn money. This gives your creative brain, more time to do what it was meant to do. Enjoy life and create pleasure.
When this happens, you become more passionate about your life because you are thinking on a higher level than you were used to thinking. Hope starts seeping into your thoughts, and you begin to picture more for yourself and your loved ones.
Spend 80% of your time thinking of ways to increase your income and 20% of your time budgeting what you currently have. It is the simplest 80-20 rule of personal finance around and the most productive. Try it for a few months. See if it checks out.
