According to a 2023 study by Credit Karma, 69% of Americans have financial regrets from 2023. The most common regret is not saving money (31%).
I can without a doubt say that one principle you might already know completely transformed my ability to build and stick to money habits and become a debt-free millionaire. In 1906 Italy, Vilfredo Pareto noticed that most of his precious peas would perish, except for a small portion, constituting the majority of his crop. More specifically, he noted that 20% of his crop produced 80% of his harvest.
He extended this principle to macroeconomics, showing that 80 percent of the wealth in Italy was owned by 20 percent of the population. You probably now know it as the Pareto Principle or the 80/20 rule. I like to refer to it as “the rule of world peas”.
The 80/20 rule serves as a way to position your habit building, particularly if you are a perfectionist or an overthinker. The habit is simple in theory, but hard in practicality: find the 20% of your time, resources, and efforts that can yield 80% of the results or rewards in your money goals. Here’s how you can apply the principle of world peas to your money habits in three different ways.
Prioritize The 20% Of Accounts That Produce The Most Return
The first way I apply the 80/20 rule and that I suggest that you apply it, is to look at your finances in the same way that Pareto looked at his peas. Instead of dedicating too much time to money accounts with minimal return, prioritize the 20% that have the most potential for gain.
What are the 20% of money accounts that would drive 80% of your success? For example:
- What are the one or two accounts, out of the 20 you’ve curated that could materially change your financial situation?
- Identify your best 20% of assets or investments that you can build confidence in growing
- Move those items you’ve been avoiding at the bottom of the list to the top
- Shift your focus to increasing your retirement accounts instead of just collecting credit card rewards
This principle can also apply to prioritizing what gets your attention in your budget each month. If you are like me who consistently overspends on food, set aside other items in your budget this month and focus that extra 20% of energy optimizing how you shop, plan and prepare your meals. Set aside other priorities for this month, and potentially for the next few months until you figure out the routine that you can sustain.
Get Rid Of The 20% Of Accounts Causing The Most Drama
The second way to apply the 80/20 rule is to eliminate the 20% of your accounts that are causing you the most drama. It’s time for some honest introspection – identify the 20% of the money accounts causing 80% you to lose the most sleep. Eliminating these could reshape the trajectory of your financial future.
In the 1940s, an operations management researcher Dr. Joseph Juran found that 80% of product defects resulted from 20% of problems in production methods. Even if you’re not an operations expert, this feels intuitively easy to understand.
In a production plant, he found that reducing 20% of the production problems could increase the overall quality of their products. I like to think about this by looking for the squeaky wheels in your financial plan, that’s causing you the most stress. Rather than chipping away at them, little by little, focus on getting rid of them for good. Maybe it’s one or two accounts or recurring bills or that debt that you’ve avoided making progress on and focus your effort to reduce it. Perhaps it’s the feeling you don’t have enough in savings, so now’s the time to make that your top 20% and reduce 80% of your stress.
When applying the 80/20 rule in the first year I pursued financial independence, I focused my efforts on paying down debt. Reducing my debt was the top 20% priority of my overall financial plan. It got the vast majority of my attention for a whole year, while setting aside my other goals like saving for retirement or going on vacations. That may seem like it was a hard year, but in hindsight, trading that intense focus to pay off $72,000 of student loans in one year instead of a decade meant that I never had to stress about student loan debt again.
Applying the rule this way challenges you to focus on finding the things that will create the best financial results, specifically if you’re newly learning about finances, or you’re not sure or are worried about investing. But it can be much easier to identify items in your financial plan that would relieve the most amount of personal stress, even if it’s not mathematically the most beneficial.
Perfectionists Never Achieve Financial Freedom
The last way to apply the 80/20 rule as a money habit is to repeat this: 80% is good enough. Perfectionists never become financially free. Let’s say that you continued practicing perfectionism and you actually reached the mathematical calculation of financial independence in your net worth.
What do you think your anxiety level would be? How carefree would you really be? How bogged down by numbers and accuracy would you be versus savoring the relationships and the joy?
Oftentimes, I coach very smart, incredibly capable people who stop budgeting and stop moving forward with their financial freedom plans, because their mentality is all or nothing. An all-or-nothing mentality will likely lead you to nothing rather than all. Expecting that you’ll be a hundred percent perfect is actually a surefire way to fail. Achieving 100% perfection in personal finances is unrealistic.
As you attempt new habits to move forward in your financial freedom plan, remember the 80/20 rule. If you can only do 80%, consider that good enough, perhaps even great.
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