My Personal Finance Odyssey

Pareto’s Principle (80/20 Rule) of Personal Finance April 7, 2007

Some of you may remember the 80/20 rule or Pareto’s Principle from college or from your work life if your company subscribes to Six Sigma methodology. For those who aren’t, the 80/20 rule was developed by Italian economist Vilfredo Pareto to describe the unequal wealth in his country, observing that 20 percent of the people owned 80 percent of the wealth. Similar observations were made by others in other areas such as Quality Management (the vital few and trivial many).

The 80/20 Rule means that only a few things are vital (20 percent) and the remaining are trivial (80 percent). You have probably seen many examples of this in business where 80% of a given problem are only caused by a few things…or 80% of your company’s sales may be with only 20% of your key clients. The point of the Pareto principle is to suggest that you focus your energy on the 20 percent that really matters.

I think this also applies to personal finance. While I am a big advocate of learning as much as you can and doing whatever you can to create wealth, there’s probably about 20% (the vital few) that are truly critical to achieving your financial goals.

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