Did you know that, back in 2022, the lack of financial literacy cost 15% of Americans at least ten grand? That’s right! While most can find a way to land a dream job that pays well, it’s not everyone’s cup of tea to effectively manage their money. As a matter of fact, many people have no clue that they may be spending more than they should without saving enough for their future!
However, the good thing is that it is never too late to start saving without complicating your finances. All you need is basic knowledge about how to save with regular effective budgeting. That’s why, in this article, we’ll discuss the 80/20 rule to help you simplify your finances while saving for the future!
What Is the 80/20 Rule?
The rule of 80/20 states that the inputs or causes are accountable for 80% of the outputs or effects. The rule is applicable in various fields, including business, productivity, economics, and finances. Vilfredo Pareto is credited with being the first to notice the 80/20 rule, commonly known as the Pareto principle.
Vilfredo Pareto, a 19th-century economist and sociologist from Italy, discovered that nearly 20% of the pods of peas in his garden produced 80% of the peas. He took the concept into cognizance and went further to notice that 20% of the population owns almost 80% of the entire land in his country! It established the applicability of the principle in macroeconomics.
It made him contemplate that this same scenario could be observed almost in any field that involved numbers. So, he came up with the principle that 20% of the variables are responsible for 80% of the outcome. The principle is now popularly known as the “80/20” rule.
Although the rule applies in various areas, we’ll discuss its applicability in personal finance.
In the Context of Savings
When it comes to savings, the 80/20 rule says that an individual should put 20% of their monthly income into savings. However, it’s totally up to you to put your money into a savings, brokerage, or retirement account. The rule focuses on putting aside enough money for the event of financial difficulty. As per the rule, you can use the remaining 80% of your earnings for wants and needs.