Published on

How to Use the 80/20 Rule for Smarter Money Management

Authors

How to Use the 80/20 Rule for Smarter Money Management

August 23, 2022

Let’s be honest, talking about money can feel…well, a little daunting. But what if I told you there’s a surprisingly simple strategy you can use to get a better grip on your finances? It’s called the 80/20 rule, and it’s simpler than you might think.

You’ve probably heard of Pareto’s Law, which states that roughly 80% of effects come from 20% of causes. Applied to money, this means that 80% of your spending comes from 20% of your expenses. Sounds a little harsh, right? It doesn’t have to be! It’s a tool for identifying areas where you can make the biggest impact.

So, How Do You Actually Use the 80/20 Rule?

Here’s a breakdown of how you can start applying it to your life:

1. Track Your Spending: The first step is crucial. You need to know where your money is going. For a month (or even a two-week period to start), meticulously track every single dollar you spend. There are tons of apps that can help with this – Mint, YNAB (You Need a Budget), and PocketGuard are all popular choices. Spreadsheets work great too!

2. Identify Your "20%" Expenses: Once you’ve tracked your spending, analyze it. Where is most of your money going? Common culprits often include:

  • Dining Out: Do you eat out frequently?
  • Entertainment: Subscriptions, movies, concerts, etc.
  • Shopping (Clothes, Gadgets, etc.): Impulse buys can quickly add up.
  • Transportation: Gas, parking, public transport.

3. Focus on the "20%" – Where You Can Cut Back: Now that you’ve identified your biggest spending areas, it’s time to make a plan. Don’t aim for drastic cuts all at once. Start with small, manageable changes.

  • Example: If dining out is your biggest expense (let’s say 30% of your spending), commit to cooking at home 3-4 nights a week.
  • Another Example: If subscriptions are eating into your budget, cancel one you rarely use.

4. Don’t Neglect the “80%” – Necessary Expenses: The 80% of your spending – like rent, utilities, essential groceries, and transportation – are important and shouldn't be completely sacrificed. The goal isn’t to eliminate them, but to gain control and reduce unnecessary spending.

5. Review and Adjust: The 80/20 rule isn't a "set it and forget it" strategy. Regularly review your spending and make adjustments as needed. Life changes, and so will your priorities.

Why This Works:

The 80/20 rule isn’t about deprivation. It’s about conscious spending. By focusing on the 20% that’s driving the most spending, you can make a huge impact on your financial well-being without feeling like you’re sacrificing everything you enjoy.

Resources to Explore:

Do you have any experience using the 80/20 rule? Share your thoughts in the comments! (Okay, technically there aren't any comments here, but let's pretend!).