The 80/20 Rule

by James & Miel on July 4, 2007 · 0 comments

Hello All – Happy Independence Day!

There are plenty of news stories covering the financial aspects of the 4th of July holiday, so we’re not discussing that. Instead, today’s posting is on the 80/20 rule, The 80/20 rule is also known as the Pareto Principle. Since most of you aren’t professional economists, in 1906 the Italian sociologist, Vilfredo Pareto, observed that 80% of Italy’s real estate was owned by 20% of its population. Ever the gadfly, Pareto also noted that similar relationships was found in other European societies, thus he proposed a scientific law of human behavior called the Pareto Principle.

Obviously,1906 was somewhat before the modern age of American Business. In 1941 Pareto’s ideas were dug up an American industrial engineer, Joseph M Juran. In a typical American company, Juran saw that 80% of a problem was due to 20% of a cause and widely applied Pareto’s principle to contemporary business management.

So, what does the 80/20 rule mean for your personal finance? We’ll if you’re someone like David Bach, you’d argue that to pay down your debt or increase your income, you should focus on identifying and addressing the few activities which most impact what you want to do. For example, since taxes are usually your biggest expense, it might make sense to focus on being tax efficient, rather than trying to save a few bucks by clipping coupons.

The 80/20 rule – worth some thought.

Best,

James



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