The 80/20 Principle Explained

The 80/20 principle, often referred to as the Pareto Principle or the Law of the Vital Few, is a naturally occurring law which shows that effort and reward are not equally matched. When we are growing up, we are led to believe that all efforts are equal and all time is equal. However, this is not the case. What the 80/20 principle shows is that a small number of our activities (roughly 20%) bring about the majority (roughly 80%) of the rewards/outcomes that we achieve. The remainder of our activities (roughly 80%) bring about a very small amount of our rewards/outcomes. What this demonstrates is that the true value of any resource e.g. time, energy, money; lies in how we use that resource.

In fact, if we invest more of our resources in the activities which reap the highest rewards while, cutting down on or, eliminating the activities which bring little reward; we can significantly improve our lives while doing less. Therein lies the true beauty of the 80/20 principle.

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The history of the 80/20 principle

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The 80/20 principle was discovered by Italian economist, Vilfredo Pareto; though Pareto did not give the principle a name. He found, through his studies that a small percentage (approx. 20%) of the population held the majority (approx. 80%) of the wealth. Regardless of the country or, time period, that he studied, he found that the distribution of wealth was unevenly balanced.

Pareto did not take his studies much further than this but academics such as Zipf and Juran later found that the same principles applied to other areas of life. Whereas humans had always thought that things were balanced and everything was distributed equally; more and more studies have shown that balance and equal distribution are not naturally occurring. The lack of balance and equal distribution is often predictable and once it has occurred, it is usually very easy to identify.

What this means for our individual lives is that we can identify the actions, behaviour, people etc. which will help us to make the best progress towards our goals and; give them more of our resources – time, money, energy etc.

By focusing more on the things which bring the greatest reward and; reducing or eliminating the things which bring little or no reward; we can increase our happiness and success while doing less than we did before. And who wouldn’t want to do that?


4 Examples of the 80/20 principle

The 80/20 principle can be applied to just about every area of your life so, it would be impossible to cover everything here. Therefore, the following are just the most common examples of the 80/20 principle.

1. Time management

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Most professionals are constantly trying to achieve more with less. We try to pack more and more work into our day. This comes from a drive towards efficiency where people view efficiency as simply getting more done withe resources available. 

If that is what you are fixated on; as yourself 'what is the benefit of doing more if you are not doing the right stuff? If you complete twice as many unimportant activities, you are just ensuring that your day is twice as useless.

Alternatively, if you only completed your most important task, you would still have had an effective day. Sure, it could have been more effective but only by completing more of your important tasks. That is why you should focus on importance.

The 80/20 principle allows you to focus on importance because importance is the very nature of the 80/20 principle. Regarding time management, it is about identifying the tasks which bring the best rewards and ensuring that they get done. Anything else just isn’t a priority.

To be able to implement the 80/20 principle for your time management, you must first know:

  • Your purpose
  • Your values
  • The areas of life which are most important to you
  • Your dream for each of these areas
  • Your strategy for achieving that dream
  • The goals which will allow you to implement that strategy

It is all this information which will allow you to decide what is important and what isn’t important. You can then dedicate more time to the important stuff and less to the stuff which isn’t important.

You will find some great 80/20 strategies for your time management, here.


2. Money

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It is important to note that the economic strategy for most western countries is entirely dependent on consumerism. Governments borrow large amounts of money to develop their countries and then depend on continued economic growth to pay back the sums of money borrowed. For this to work, they need the ordinary citizen (you and I) to keep buying all manner of products.

As we fall victim to advertising and marketing tricks, we end up buying a lot of stuff that we don’t want, need or love. Much of which goes to waste e.g. I remember a study in the UK which found that 1 in every 3 bags of groceries goes into the bin without ever being used. Think about how much money that could add up to. I have no doubt that the figures would be similar for other countries and that there is a great deal of wastage in every market.

Personal Example

In 2004, at the height of the economic boom in Ireland, I bought a house for €84,500. I spent some money renovating it and in 2007, I sold it for €172,500. Shortly after; the Irish economy collapsed. The same house sold last year for €55,000.


The economic boom in Ireland had been built on an unsustainable property boom. The Government kept telling us that house prices would go up forever and we needed to get on the property ladder before it was too late. The banks were only too happy to give people mortgages which they shouldn't have qualified for.


Of course, the "good times" came to an end and the subsequent economic collapse caused devastation here in Ireland.

And of course, when it all fell apart, it wasn’t the Government, or the Banks who had to pay for the mess; it was (and still is) the consumer.

Consumerism doesn’t benefit all, for example:

  • Companies make more money through extra sales and, their shareholders are handsomely rewarded.
  • Governments take in more money through taxation and reward themselves accordingly.
  • Banks make a fortune because the consumers need to avail of credit facilities to maintain their shopping habits.
  • But the consumer is always broke because they keep spending and borrowing without ever saving or investing.

Lesson

Learn to manage your own finances or somebody else will manage them for you. And they won't manage them for your benefit.

Regarding money, the 80/20 principle teaches us to only buy what is important. It also teaches us to find the real value. Value is based on what is truly important to you; not to others and; you certainly don’t judge value based on what marketers tell you. It’s not about being mean but when you cut out all the unnecessary spending on the things which don’t add any real joy or value to your life; you will have more money to spend on the things which really matter to you and; you will also have enough to invest and grow your wealth.

The 80/20 principle also helps you to identify the best ways to increase your wealth. For many people, the following steps would greatly increase their wealth in the medium to long-term:

  • Pay off your credit card debt
  • Pay extra off your mortgage each month
  • Save 10% or more of your income, each month, in a savings account with the highest interest rate you can find.

All three examples avail of the power of compound interest. The interest rate on your credit card is likely to be your highest interest rate. By paying off your bill in full, you will avoid a large amount of interest.

The same goes for your mortgage. When you pay extra off your mortgage, you are paying off money which you would have been paying at the end of the mortgage. That sum of money would have had interest charged on it every month for the term of the mortgage. By paying it off early, you will avoid a great deal of interest. You would have to receive an incredibly high interest rate on a savings account to get a better return.

Saving 10% of your income each month in a high interest savings account will help you to accumulate a large amount of money, very fast. Each month, your income will grow with compound interest. It is like having an invisible friend help you save. The earlier you start saving, the better; as the multiplying effect of the compound interest gets better over time.

When you prioritise your expenditure, these are three very simple things to do but the reward in the medium to long-term is outstanding; far outweighing the effort required.

Note

I am not a Financial Advisor and the examples above are just for illustrative purposes.


3. Business

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Business is another area where great care is needed to invest your resources wisely. Where you choose to invest your resources can be the difference between success and failure so, you want to ensure that you are investing wisely. The following are some examples of what the 80/20 principle teaches us:

Not all customers are equal. Most business people know this but when they decide which customers should get most of their attention; they tend to choose the customers who produce the highest revenue. The problem with this is that few businesses have an accurate figure for how much it costs them to acquire and service a customer. Revenue is not the important figure; profit is.

You are in business to make a profit e.g.:

  • A customer who provides $1 million of revenue each year sounds great but if it is costing you $1 million each year to service that customer; they are a burden to your business.
  • Alternatively, a customer who generates $50,000 of revenue while only costing $10,000 to service is a far better prospect.

In the example above, you might be better getting rid of the first customer and investing more resources into growing your business with the second customer.

Not all products or services are equal. Again, most business people know this but they look at revenue rather than profits. The 80/20 principle reminds us that the important figure is profit. For example, in my business, I avoid physical products at present. Although I could charge higher prices for them, the delivery and customer service costs involved makes them less profitable.

There are an endless number of areas in business where you can apply the 80/20 principle but the most important thing to note is that the 80/20 principle allows you to identify what is important so that you can gather the necessary information and then; make the best decision based upon that information.

Less with more is not a pipe dream. The 80/20 Principle makes it possible.

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4. Relationships

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Relationships can be one of the most beautiful things in life but they can also be one of the most painful. I am not just talking about intimate relationships. I am talking about all manner of relationships.

The 80/20 principle allows you to identify the people who bring the most joy and value to your life. These are the people you should be spending the most time with if you want to be as happy as you can be. Unfortunately, in life, things are rarely this simple and most people end up giving their time to those who shout loudest and place the biggest demands upon them. However, when you apply the 80/20 principle you start to give your time and attention to those who deserve it. This allows you to build better relationships which help to increase your enjoyment of life.

On the other hand, there are a small number of people in everybody’s life who cause most of the problems. These people make demands on your time and attention which far outweigh the value they bring to your life. Applying the 80/20 principle allows you to identify these people and you can then remove them from your life. You don’t have to be nasty or cruel but you can simply choose to give them less (or none) of your time and attention.

Once you have removed the bad apples, it is important that you learn to differentiate between your friends and those whom you are friendly with. It is great to be friendly with many people, whom you can spend some time with from time to time or, when you bump into them. But you only need a small number of friends whom you can choose to invest yourself fully with. Learning to differentiate will make a massive difference to your life.

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Is there always an 80/20?

The 80/20 principle can be a little misleading with regards to its name. The important thing to note is that there are always a small number of actions, behaviours or even people which bring far greater reward than others. However, it is not always a matter of 20% percent producing 80%. It could be so skewed that 1% produces 99% or; maybe 25% of the inputs produces 60% of the outcomes.

As you can see by these examples, it is not the actual percentages that matter. The important thing is that you find the small number of actions, behaviour or people which bring the greatest rewards, value and joy to your life and; you invest your resources there to ensure that you get the best return in your life. You could cut out most of the things you do in life and still be happier and more successful.

Just because you can’t see an 80/20 situation doesn’t mean that there isn’t one there. For example, in the early stages of business, it can be hard to identify the most valuable customers and products. It can be very hard to be objective when viewing your relationships so that you can identify the people who add value and those who don’t. It can take patience and dedication to see where the real opportunities for improvement lie.


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The 80/20 Principle is all about sharpening your focus.


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Conclusion

The 80/20 principle occurs naturally, whether you want it to or not. It is why the rich keep getting richer, powerful people get more powerful, happy people keep getting happier. It is even the reason why 20% of your carpet takes 80% of the wear and; you wear 20% of your wardrobe 80% of the time. The 80/20 principle brings real opportunities for growth and improvement to our lives by allowing us to identity the few things, actions, behaviours, people etc. that make our lives better. We can focus more of our resources in these areas; cutting out all the unimportant stuff in the process. The 80/20 principle, properly applied, leads to greater opportunities for happiness and prosperity.