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.

Sent from James' iPhone