The 80/20 Rule and How It Applies to Building Wealth

The 80/20 rule, also known as the Pareto Principle, is a powerful concept for building lasting wealth. It states that 80% of outcomes come from 20% of causes. This principle can guide your financial behaviors and investment strategies.

Focus on High-Impact Areas

Don’t spread yourself thin trying to improve every little thing. Identify the 20% of areas that matter most for your finances. For example, increasing your income or investing early and consistently may have an outsized impact compared to cutting out a daily coffee.

Target Key Spending Reductions

You likely don’t need to eliminate all luxuries to save money. Find the 20% of spending cuts that can net 80% of savings. Big recurring costs like housing, transportation or dining out may be top targets. Avoid nickel and diming yourself.

Pare Down Investment Options

Owning too many funds and stocks can be counterproductive. Research shows a few key index funds can capture most market returns. The 20% of core holdings in your portfolio will likely drive 80% of performance. Keep it simple.

Double Down on What’s Working

Look at what already generates the most results in your financial plan. If a side hustle produces ample income, invest to grow it further. If an equity fund has significantly outperformed, increase your stake. Leverage what already works well.

Automate Key Tasks

Don’t waste time on repetitive financial chores. Automate the 20% of tasks that produce 80% of results. Set up automatic transfers to investment accounts. Use bill pay for recurring payments. Streamline routines.

Continuously Learn In-Demand Skills

Learning can dramatically boost income. But not all skills have equal value. Focus learning time on the 20% of skills that drive 80% of top salaries, promotions and opportunities in high-growth fields.

Connect with Top People

Surround yourself with talented, motivated people that inspire you. The 20% of relationships that expose you to new ideas and opportunities will likely generate 80% of your growth. Be selective about your inner circle.

Take Time to Recharge

Avoid burnout from overwork. The 20% of restorative activities that re-energize you, like exercise or quality time with family, enables the remaining 80% of productive work. Make time for renewal.

The 80/20 rule empowers you to identify and focus where it matters most. Apply it to build the essential foundations for sustained wealth.