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What is the Pareto Principle? - 80/20 Your Finances Skip to main content

What is the Pareto Principle?

Roughly 80% of the effects come from 20% of the causes.

Or put another way 20% of your effort leads to 80% of your outcomes.

Now, I’m human. And you’re human – unless you are one of those internet robot things. But I digress.

You, my dear reader, are human. And you and me and all our neighbors are lazy.

So let’s apply this to 80/20 rule to personal finance. Do you want to work on the little things that take up 80% of your personal finance life to get 20% results? Or would you rather focus on the 20% of things that make up 80% of the results? Think about that for a second…

I hope it doesn’t take more than a second for you to realize that you should be focusing on the few but big things in your financial picture.

And this my friends, is why I hate coffee. Or more specifically the Latte Factor.

What is the Latte Factor?

I’m sure this isn’t your first personal finance blog that you have ever been to. I’m almost 100% sure that you’ve heard about how you can change one small thing, like your daily stop at Starbucks, add those savings to your bank account, and retire a bajillionaire. It was made popular by best-selling author Davod Bach.

Let me skip to the part where it probably didn’t work for you.

Think about this for a second. You want to save $1,000,000. How many lattes do you have to skip to save $1,000,000, even with compounding interest? At a $2 hit each day, it is going to take you… well, neither one of us will be around to see that milestone.

Now, don’t get me wrong. Savings add up. And you should attack your budget to find all the savings that you can. But since you and me are both lazy, we want to get the big hits with the smallest amount of effort, right?

Enter the Pareto Principle

Sorry for the detour through the Latte Factor. But it helps to explain my approach to personal finance. I want you to focus on two things here at the beginning: making more money and lowering your housing expenses. Later on, we can talk about the other 80% to top off your personal finance plan.

But for now, your goals:

  1. Make More Money; and
  2. Spend Less on Housing

Along the way, these two things will affect the other 80%. For example, one of the tips I’ll discuss soon will be to reduce housing costs by refinancing your house. To do this, you’ll need to get your credit score and report cleaned up. Which will also help with your credit card interest rates and your debt payment schedules. So you’ll probably work on that first but with the end goal of spending less on your housing.

Buckle Up, It’s a Long Journey

This is no get rich quick scheme. You are going to be working and working hard. The idea is to set you up on a long-term path to success. I’ve been doing this for 11 years and I’m not to my end goal yet. I’ve hit some smaller goals along the way and have some coming up that I will share with you on this journey. I’ll even share some ideas that go against the grain from your typical financial press advisors. These have worked for me or for others. They won’t work for everyone.

And yes, I know that to a certain extent this personal financial site will not work for everyone. I don’t need it to work for everyone. But maybe you can take a few ideas here and there and build your own personal financial pathway to success. Perhaps the Dave Ramsey or David Bach systems work for you. They have for many and I am not knocking them. And you’ll even see a few of their ideas that I have used over the years. Rarely will a system fit perfectly off the shelf. You’ll need to learn what works for you, adapt what you can to your life, and discard the rest.