The Pareto Principle and Building a Better You
Tip It!The Pareto Principle holds that, for many events, 80% of the effects can be attributed to 20% of the causes. Also known as “the 80/20 rule,” or “the law of the vital few,” the Pareto Principle has been found to apply to a surprisingly wide variety of things in everyday life.
Examples of the Pareto Principle
The Pareto Principle is named after Italian economist Vilfredo Pareto (1848-1923), who observed that 80% of the land in Italy was controlled by just 20% of the population. Intrigued, Pareto looked to other countries and found similar ratios. More recently, a 1992 United Nations study revealed that 80% of the world’s wealth (actually 82.7%) is controlled by 20% of the population.
Looking more broadly:
- It’s been long recognized, or at least assumed, that 80% of sales come from 20% of clients (or 20% of salespeople).
- Microsoft has noted that, by fixing the top 20% of bugs, they could squash 80% of errors and crashes. (Note: I wonder when they’re planning on doing this…)
- In 2000, 20% of taxpayers paid 81.2% of US income taxes. (Note: This is perhaps not surprising given the large share of wealth that they control.)
- 20% of employees account for 80% of absenteeism.
- It appears that fellow blogger J.D. Roth wears 20% of his shirts 80% of the time (if not more).
And the list goes on.
Why the Pareto Principle matters
To see how this principle can help you in everyday life, it might be best to turn it around…
What would you do if I told you that 80% of your efforts are (in many cases) largely wasted, producing only 20% of your results? I’d be willing to bet that you’d take a closer look at how you spend your time and make some changes.
While it’s arguable whether or not the numbers really work out to 80/20 in any particular case, the larger point still stands… The majority of your productivity typically comes from a minority of your efforts.
By looking critically at how you spend your time/effort, you can dramatically improve your productivity. Try to identify the things that produce the most results and focus on doing them. Likewise, try to shun (or at least streamline) activities that don’t produce much in the way of results.
The same principles can, of course, be applied to things like spending. While you may have certain critical things that are indispensable, yet only used rarely, I’d bet that you only regularly use a small fraction of your “stuff.” If you can learn to look at your purchases with a more discerning eye, your money will go further, and you’ll wind up with far less clutter.
Have you ever evaluated how you spend your time/efforts/money in this way? If so, what did you find? And what (if any) changes did you institute?
Published on September 14th, 2009 - 13 Comments
Filed under: Frugality, Productivity, Working
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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September 14th, 2009 at 10:26 am
I cannot stress how much this post has inspired me!
It is actually crazy that you posted this today (especially the reference made to JD @ GRS.) because I have plans to go through my wardrobe and get rid of most of my clothes… no joke.
Now… I am even more motivated to go get it done ASAP – and will also be applying the concept to my Time Management (another focus of mine lately.)
Great stuff Nickel.
September 14th, 2009 at 12:50 pm
No statistics here, but it’s a high percentage bet that the leaders in most fields are people who’ve mastered this concept and spend most of their time working on the 20% of their efforts that are most productive.
That’s a discipline that once learned could be truly revolutionary.
Practically speaking, the 20% of functions that are most productive can probably be easily identified as also being the ones we like to do least, maybe because we inherently know that the stakes are higher, and of course, so is the stress attached to them.
September 14th, 2009 at 3:57 pm
Kevin has it right. You talked about 80% of your efforts produce only 20% of your results. You should be more focused on the 20% of your effort that produces 80% of your results, profit, revenue, etc. That is the more important statistic in the equation.
September 14th, 2009 at 5:12 pm
Yep, I’ve long applied the 80/20 rule to life. At work, twenty percent of my actions lead to 80 percent of the payoff. Darn that Gmail!
With friends, 80 percent of the true friendship (and good advice) comes from 20 percent of my friends, including my Mom.
In writing, the really good stories comprise about 20 percent of my total output (on good days!)
Looking at how the 80/20 rule plays out, it would seem that the 80 percent is not really worthwhile.
But it is.
We can’t be hyper efficient all the time, and more importantly, without the 80 percent, we wouldn’t ever get to the super special 20 percent. Sometimes it is necessary to spin some wheels and to take chances because we don’t know what is going to pan out and what won’t.
I hate to see this applied to money, because that means we need to spend more to buy the stuff that turns out to be very valuable to us!
Hmmm, maybe it’s worth spending some time trying to circumvent the 80/20 rule on purchases.
September 14th, 2009 at 5:14 pm
Hank – That is spot on. I was scratching my head why we were talking about the other way.
80/20 rule is largely useful for segmenting clients, if you have any.
September 14th, 2009 at 7:59 pm
Hank: Yes, that’s the entire point of this post. That’s why I said:
“Try to identify the things that produce the most results and focus on doing them.”
In other words, find those things that you do in the productive 20% of your time and expand on them. I only turned it around to provide a different (and hopefully shocking) perspective.
September 14th, 2009 at 8:10 pm
Financial Samurai: Read it again. All Hank did was reiterate my argument:
“What would you do if I told you that 80% of your efforts are (in many cases) largely wasted, producing only 20% of your results? I’d be willing to bet that you’d take a closer look at how you spend your time and make some changes.
While it’s arguable whether or not the numbers really work out to 80/20 in any particular case, the larger point still stands… The majority of your productivity typically comes from a minority of your efforts.
By looking critically at how you spend your time/effort, you can dramatically improve your productivity. Try to identify the things that produce the most results and focus on doing them. Likewise, try to shun (or at least streamline) activities that don’t produce much in the way of results.”
Bold emphasis added. The only reason I turned it around was to emphasis what a colossal waste of time that “other” 80% of your time is.
September 15th, 2009 at 10:08 am
It’s fair to say that this applies to just about everything in life! Inspirational, and informative. Thank you.
September 15th, 2009 at 10:32 am
The trick with the 80/20 rule is finding the “right” 20% . . .
September 15th, 2009 at 10:39 am
DDFD–Outstanding point. Sadly, most of us don’t know which 20% of our activity is generating the positive results.
Probably because the 80% that aren’t are more fun.
September 15th, 2009 at 10:53 am
@DDFD & Kevin: Prioritize your tasks in A, B, and C groups by matter of importance of completion (A being most important.) Keep a daily journal of “accomplished” tasks for at least a month. In the journal, record all time spent on tasks. Do the A task first, and never do the B or C tasks unless you have already completed the A tasks. At months end, go back and review your data – all time spent completing A tasks is your 20%.
September 15th, 2009 at 5:08 pm
Thanks Nickel. I see your point now. The 80/20 rule is pretty close when it comes to client business. Sometimes it’s 70/30 or 60/40, but the point is the same.
The risk of only focusing on the 20% is that what if some of the other 80% of your clients grow big. They will resent you for not paying any attention to them, and that is the key risk. Things are always evolving.
September 16th, 2009 at 3:46 pm
This is a good post.
And to take it a step further… once you focus more on the 20 percent of what you do (increasing that 20 to 30, 40, 50 etc… while cutting down or decreasing the 80 percent wasted ) Things will realign themselves in such a way that 20 percent of your NEW actions will account for 80 percent of your production.
The cycle towards ultimate productivity will never end.