- What Is The Pareto Principle?
- The Imbalance Of Wealth Versus Population
- Real-World Examples Of The 80/20 Rule
- Applying The Pareto Principle To Your Life
What Is The Pareto Principle?
The Pareto principle states that 80% of the consequences are due to 20% of the causes. It is only an observation from various aspects of life and does not apply to every single scenario. The 80-20 breakdown is a rough split and not an exact measure.
Even if you aren’t familiar with the Pareto Principle, you’ve probably heard of the 80/20 rule. It all comes from an economic theory that was named after famed economist and philosopher Vilfredo Federico Damaso Pareto. During his life in Italy during the second half of the 1800s, Pareto contributed much to the world of business and economics.
It’s said that this theory of an 80/20 distribution in the world came from Pareto observing pea plants in his garden. The story goes that he noticed that 80 percent of his harvest came from 20 percent of the plants he grew. This observation led him to look elsewhere in life to see if this uneven distribution was a once-off phenomenon, or something more interesting.
As he investigated the theory, Pareto discovered that the 80/20 split could be found in vastly different areas in the world. It somehow seemed to be part of the planet’s very nature.
In simple terms, the principle indicates that 80% of the results come from 20% of the overall efforts.
Pareto put the focus of his investigation largely into the world of economics, as this was his passion. However, this doesn’t mean Pareto’s Principle can’t be applied to almost any area of your own life. Before we delve into that, let’s first understand what the principle is, and explore a few examples of it in the real world — then we can look at how to use it to improve everyday life and personal financial wellbeing.
The Imbalance Of Wealth Versus Population
Pareto’s peas may have been the starting point, according to legend, but the principle really took shape when he began observing the wealth distribution in Italy. Pareto noted around 80 percent of the land in the country was owned by only 20 percent of the people who lived locally. This was a rather massive – and easy to see – discrepancy in distribution.
From there, Pareto began to explore industries that were active in the country’s economy and discovered the 80/20 split once again. His research showed that 20 percent of the companies in each industry he looked at made up around 80 percent of production totals.
Seeing this ratio again and again led to the foundation of Pareto’s Principle:
The majority of the consequences (80 percent) are a result of only a minority of actions (20 percent).
Real-World Examples Of The 80/20 Rule
If you look around, you will find many instances of the Pareto Principle.
Business and employees:
If you look at just about any company, you’ll see that a large portion of the work is done by a small percentage of the workforce. This is because some people are simply able to work more efficiently, while others are happy to do the minimum required for their salary.
On the income side, most of a company’s profits can often come from a small number of their regular clients. In service industries, you get regular clients that come back time and again, and they form the base of your business. The once-off clients are great because they add in extra income towards savings or special projects.
Your day to day life:
You can also look at your personal life and the way you live. How many pairs of shoes do you own, and how often do you wear all of them? If you’re not a fan of footwear, use clothes as an example. Most of us have our favorite two or three pairs we go back to depending on the occasion. The rest are wheeled out once in a while, for a change.
The same applies to our social circles. We’ll socialize with the same core group of friends the majority of the time. For special occasions, we’ll widen the invite list and bring in the other 80 percent.
Wealth and taxation:
Have you noticed how the richest people have a lot more wealth than the middle class? The 1992 United Nations Development Report showed that over 80% of the global income was generated by 20% of the population.
Taxation follows a similar trend because of such difference in earnings. The top 20% pay over 80% of the tax in the US.
Microsoft had observed that 80% of their errors and crashes occur due to 20% of the bugs. To make that interesting, 80% of the total errors stem from 20% of the code. Users also follow a similar split where 80% of people only use 20% of the features provided. If you disagree, ask yourself how much can your phone do vs what you actually use it for.
- 80% of the crimes are committed by 20% of the criminals
- 80% of your profits come from 20% of your investments
- 80% of sales come from 20% of the clients
- 80% of the complaints come from 20% of the customers
- 80% of the words used come from 20% of the dictionary
- 80% of the time, you use 20% of the apps on your phone
Applying The Pareto Principle To Your Life
Some people swear by the 80/20 principle and use it as if it were some kind of universal truth, or law that we’re all bound by. It’s worth noting that it’s a general observation that does seem to come up fairly regularly. The numbers also don’t have to be exactly 80/20 for the situation to fit the principle.
When applying the Pareto Principle to your life, the most important element to consider is time management. We tend to take on too much or put too strong an emphasis on things that aren’t going to help us truly achieve what we want.
It’s all about aiming for the high-value task or goal first, rather than doing all of the smaller ones that don’t have as big a payoff.
What Work Is Bringing In the Most Money For Effort?
The biggest mistake that almost all human beings make is putting too much time and energy into things that aren’t giving us enough back. This is mostly applied to your financial or work arenas, but can be applied to relationships, hobbies and even items that you own.
To achieve balance in your life, you need to put the most effort into things that give you the most back – financially and emotionally.
If we’re looking at the financial aspects, which Pareto’s Principle is meant to apply to, start by analyzing what you do specifically that brings in money. In all likelihood, you’re looking at around 20 percent of the time you spend working brings in 80 percent of your income. With a few small, subtle changes, you could be making more money and getting a lot more done.
On the personal front, you could find you’re dedicating too much time to things in your life that aren’t contributing positively.
For example, a hobby should be a fun way to destress and improve your emotional and mental wellbeing. If you’re spending too much time on the admin of this hobby – perhaps you got voted onto the committee of your club or took on a class to master a new element of the craft – it may no longer be beneficial. It might be time to step back from something you love doing to benefit you overall.
Which Tasks On Your To-Do List Will Benefit You Most?
To make those small changes to both work and play, it’s time to start analyzing your to-do list.
We’ve all had days when we feel like we’ve been incredibly busy, but don’t seem to have accomplished anything. This is because we spent too long focusing on items on our to-do lists that aren’t that important.
Instead, we should be carefully selecting what we are going to tackle each day, based on how much that task will give back in value. These are usually the harder tasks that seem far more daunting and complex to finish and tick off the list. However, the payoff at the end of the day is usually far greater, as completing these tasks will make a tangible difference.
It’s very tempting to look at your to-do list and decide to get the small items out of the way first.
The thinking makes sense—if the easier items are off the list, you won’t have them hanging over you while you tackle the big-ticket activities. However, these low-value tasks can take hours to complete and exhaust you before you finish them. There is also a never-ending supply of these types of tasks, and they can be used as a procrastination point for avoiding the bigger ticket items.
The key is to tackle something of high value – something in your top 20 percent – and get that done instead of handling all the smaller tasks – in your bottom 80 percent.
This way, you know you’ll have accomplished something worthwhile every day instead of putting it off until later – a later that may never come.
You can step it up further by applying the same logic to groups of tasks too. How many of your meetings are making a difference? Which are the tasks that make the biggest difference to your growth?
Doing this creates a good habit of being productive, instead of procrastinating under the guise of being proactive. It sets you up to be more efficient at work, and in your personal life.
Do You Have Defined Goals In Mind?
To work out your top 20 percent, you must define your goals first. This should be your starting point for anything in life.
Without clear, definable goals based on what inspires you and what’s within the realm of possibility, you won’t be able to succeed in anything.
You can use the 80/20 principle to help you achieve those goals once you’ve defined them. By doing this, you’ll easily be able to pinpoint the tasks that will help you reach those goals. Then, you can allocate proper time and effort to each task. It’s a symbiotic relationship that will help you stay motivated and be more careful about how you spend your time.
That’s not to say there won’t be times when you have to get those small tasks done or work on things that don’t serve your ultimate goals. We all have to do things that we don’t want to do. However, using your goals and the ability to concentrate on the more important tasks will help you stay focused on your long-term plan for life.
What Is Preventing You From Achieving Your Goal?
Nothing is ever going to be easy sailing in life, and nothing worth having is ever truly easy to attain.
There will, unfortunately, always be obstacles in your way that you’ll need to overcome. Some of these obstacles will be internal, while others will be external.
When it comes to external obstacles, you don’t have much—or any – control over them.
These are things like needing to work a job that isn’t going to lead you to the career you want, or having to pay off debts like student loans instead of saving to open your own business. This doesn’t mean you can’t do anything about these obstacles.
You can prepare and plan a way to overcome or deal with external obstacles. Put together a strategy to pay off that debt, or move away from the job you don’t like and into something better suited to your goals. The trick is to think ahead and make sure you have contingencies to deal with external obstacles.
Internal obstacles are ones that you do have control over, although they’re often even harder to deal with than their external counterparts. This is because they’re related to your mindset, your skill levels, and your general attitude towards life. If you are, for example, good at procrastinating or always put other people’s needs first, you’ll need to work out how to change your habits.
It’s also a lot harder to identify your internal obstacles. The process requires you to be completely honest with yourself about some of your less likable traits, which is never easy. If you want to get rid of the habits that are holding you back, you need to take a look at your personality and work out why those habits formed in the first place.
There you have it. If you’re looking for ways to be more productive, the Pareto Principle may be the right path for you.
After reading this you may realize how often the 80/20 rule appears in your life, and how you can use it to your advantage. Now’s the time to do so, no one ever got ahead by staying the same.
Nina Sharpe is a content champion for various outlets, covering various business topics from finance for startups to small business accounting tips.