Pareto Principle Applied to Savings

Pareto Principle Applied to Savings

Some of you are probably familiar with the Pareto Principle, but for those of us (cough – myself – cough) who had to Google it to make sure, the Pareto Principle is pretty awesome. Seriously. It means that 80% of our results are determined by 20% of our actions. So, here’s the Pareto Principle applied to savings.

As someone who’s obsessed with personal finance, I always try to find a common link back to my money.

When I read about the likes of Elon Musk and George Washington, I can’t help but identify helpful themes that will help us on our path to financial independence.

Pareto Principle Applied to Savings

Those themes often represent the core 20% of my activities. I boil it down to three key elements: frugality, work ethic, and fortune. My list include fortune because we can get it all right but still be struck down by that proverbial lightning bolt.

Pareto Principle Applied to Savings Picture 1

My favorite part about frugality and work ethic is that they’re comprised of our daily habits. I harp on habits because habits happen automatically and without any serious mental effort required.

Saving money on autopilot thanks to Habits!? Yes, please.

But, forming habits might take some SERIOUS mental efforts to set them up in the first place.

Two of our most popular podcast episodes cover this exact topic: Pareto Principle and Identifying the Largest Areas to Save Money

Here’s the clip for Pareto:

Here’s the clip for Saving Money:

In our household, 80% of our results come from two decisions we made in 2015:


The first was moving closer to work.

We no longer needed a car or public transportation. The savings also helped our health as we needed to walk everywhere.

Given that home was now a 5 minute walk from work, I also felt less inclined to go out for meals. Waiting in line at Chipotle often took more time than walking home and preparing my own meal.

Pareto Principle Applied to Savings Picture 2

The one decision to move closer to home led to a half dozen new habits in my life that each led to more savings.

If we were not able to move closer to work, then we would have also considered finding a job that was closer to home.

The second was capitalizing on my value by negotiating higher salaries.

My pay doubled in less than 4 years thanks to the skill I developed to have a crucial conversation without it being confrontational.

I used to have a college professor who said, “Don’t sell your skin too cheap.” His analogy may have been a bit extreme, but maybe not. We can never replace our time so the least we’ve done is make sure we’re paid for what we’re worth.

These two decisions are my application of the Pareto Principle and the results I’ve seen.

What are the results in your life from having applied the Pareto Principle to savings?

-Matt

9 comments… add one
  • Full Time Finance Feb 3, 2017, 7:40 am

    Automating our savings was probably the biggest part of the 20%. If you don’t have it, you can’t spend it.

    • Financial Panther Feb 3, 2017, 9:23 am

      Fully agree with FTF here. Automating I think is the biggest thing you can do. If you do it right away, it makes it much easier to reach your goals. You’ll be surprised at how much people can adjust to what they actually see on their paycheck.

  • Mrs. Picky Pincher Feb 3, 2017, 8:17 am

    I didn’t know it was called the Pareto Principle, but I’ve heard this saying echoed a few times. Honestly I wasn’t even sure what it meant. For us, it was the decision to plan our meals more heavily. Food was our biggest flexible expense and, after some trial and error, we’ve slashed our bill more than in half in the last two years.

  • The Grounded Engineer Feb 3, 2017, 3:48 pm

    I also agree with automating savings by setting it and forgetting it.
    I’m always looking for ways utilize technology to improve efficiency in my life. For example, with my blog I use tools like buffer to prepost all of my twitter and Facebook posts for an entire day. It takes 10 minutes each morning to write 10 posts I want published on my Twitter feed. There are other apps out their like Acorns to help with savings.
    Taking time to research the tools available to help you improve efficiency in your life will help you better implement the Pareto principle.

  • FIscovery Feb 3, 2017, 5:45 pm

    My 20%, choosing to working from home – – no more commuting costs (gas, tolls, car maintenance), no more quick stop for food on the way in or way home, no longer need for gym membership, can easily go for a run, etc.. in the morning or evening when I would be commuting, no longer a need to buy suits, go to the cleaners, etc.. big big $$$ return – – but even more important then that, more time with the kids!!

  • Jay Feb 4, 2017, 10:04 am

    Absolutely love this approach – focusing on the big wins like this has made all the difference for me too. Thanks for sharing your lessons Matt!

  • Steven Goodwin Feb 5, 2017, 10:38 am

    This is a great principle to apply! I think for us lately it’s been upping our automated savings and then learning to live on the rest. We are working to cut more and more as time goes on to get to our goals… after our meetup last month, we started talking more about the possibility of relocating closer to work to cut down on expenses too! Seems amazing that right now my wife commutes 45 minutes each way five times a week… that’s a lot of time out of our week that we could be spending more time as a family if we lived closer…

  • Millennial Money Feb 7, 2017, 8:56 pm

    Love the Annie Hall GIF. But I love how the Pareto Principle can be applied to literally anything in life – it’s like some weird secret code. What’s super cool is when you start analyzing your time and trying to determine specifically what actions generated 80% of the results. This is a great example Matt.

  • TheTirelessWorker Feb 8, 2017, 8:11 am

    Pareto principle sounds amazing when used with PF! Interesting take on how those 2 decisions helped make it so much easier for you to make the other positive decisions!

Leave a Comment