avoid

How to SAVE LOTS of MONEY FAST Using the 80/20 Rule



Sharing buttons:

it's very easy to allow yourself to get

sucked down a rabbit hole of personal

finance blogs podcasts and videos that

talk about all these different little

tips and strategies to better your

financial law in life and to be clear I

don't think that there's anything wrong

with that inherently far as I'm

concerned we never can have too many

tools at our disposal when it comes to

achieving our financial goals and

creating our dream life but if you

should ever find yourself looking at all

those different strategies spending days

weeks or even months trying to catalog

all them in your head and figure out how

to get them to fit into your perfect

financial plan to the point that it

starts to significantly delay you from

taking action then it's time to take a

step back because no goal was ever

accomplished without action and no

financial plan is gonna be perfect right

from the start much better in practice

to make sure that you get the big things

right and then correct course on the

little things as you go along because

well in many situations the tips from

these content creators including myself

are great at helping us to optimize our

financial situations and allow us to get

to our goals as quickly as humanly

possible not all of them are actually

necessary to get a successful albeit not

perfect plan going and when I say not

all of them are actually needed I mean

that because you might actually be

surprised at how many financial

situations could be almost entirely

solved with just a few small tweaks and

that's what we're gonna be talking about

today because it's amazing how many

different places you can find insights

into how you can better your own

financial situation often times they

come from the strangest of places places

that seem to have nothing to do with

money on the surface whatsoever for

example today's video was inspired by a

man named vilfredo pareto and Italian

economist who made an observation that

over the years has become very popular

in many arenas from productivity to

engineering and beyond it's known as

Pareto's principle or the law of the

vital few or perhaps most commonly the

80/20 rule and it can have an

astonishing effect on our finances if we

start viewing our financial picture and

particularly our budgets through the

lens of Pareto's idea for those who

don't already know the main idea behind

the Pareto principle is that inputs and

outputs are not evenly distributed

across activities in other words it says

that the majority of your results are

going to come from the my

of your time and effort it's been said

that Pareto first discovered this idea

when he noticed that the vast majority

of the people in his garden were coming

from a very small portion of the seeds

that he planted when he looked at other

things in the world he noticed that this

pattern appeared all over the place

for instance in addition to Pareto's

garden he noticed that about 80% of the

land in Italy was owned by roughly 20%

of the population and 80 percent of the

wealth generated in the US was created

by about 20% of the population the

numbers have obviously changed a bit

since he made his discovery known and in

many cases the ratios have become even

more severe for example distributions of

ninety percent to ten percent 95 percent

to 5 percent and 99 percent to 1 percent

are not uncommon think about income

inequality in America what are the super

rich often referred to as the top 1%

right and the majority of income created

in the country is generated by those

high income earners so while the

percentages may change depending on what

you look at the fundamental idea that I

want to get across to you remains the

same the majority of your results will

usually come from a small portion of

your efforts so how can we apply this to

our finances you ask well take a look at

your budget and look real closely at

where you're spending your money is

there one two or maybe three places

where a very large portion of your money

is going well but for most of you there

is it may differ from one person to the

next but some common areas that will

probably come up for a good portion of

us would be housing food transportation

insurance and depending on your

situation possibly debt but how much of

a difference can we make in our

financial lives if we focus the vast

majority of our efforts in controlling

and optimizing those few categories that

are controlling the majority of our

financial situation in most cases it can

be quite a lot let's take a look at how

this could work John and Jane like a lot

of us are experiencing quite a bit of

financial stress in their day to day

lives

they make pretty decent money taking

home about sixty thousand dollars a year

between the two of them but they're

still living paycheck to paycheck they

have no money to put towards their

savings and understandably they're

looking to get their heads above water

so let's take a look at their budget and

see how we could help them do that

John and Jane's budget has the following

categories housing transportation food

and Jerr

household and personal care

entertainment and debt the total cost

for each category are $3,000 a month for

housing largely because they rent an

apartment in an expensive area and this

number does include utilities $800 a

month towards their monthly minimum

payments on their debt which are split

between a car loan of John's a student

loan of Jains and some credit card debt

$500 a month for food which includes

expenses of going out to eat once a week

four hundred and fifty dollars a month

towards transportation expenses 215 a

month towards insurance ninety-five a

month towards housing supplies and

personal care items and 15 a month

towards entertainment which for John and

Jane is basically going to see a movie

once a month in total their monthly

expenses currently averaged about five

thousand and seventy five dollars a

month meaning they're actually falling

behind by an additional $75 a month

based on their income and that's not a

good thing considering that much of that

shortfall is likely to be put on their

credit card which will only increase

their debt payments and put them further

behind financially as time goes along

but thankfully there are a few things

that John and Jane could do to improve

their situation they could do what many

of us feel we're forced to do and that's

to look at what we would consider

discretionary expenses and limit or cut

those out to make up for the $75 that

they're falling short every month in

that case we would look at the movie

tickets that John and Jane buy each

month and cut that out completely saving

$15 we'd probably look deeper into their

personal care category and see that they

pay $30 a month for haircuts that they

could possibly handle themselves as well

as spending $25 a month for a pair of

local gym memberships cutting both of

those would save an initial $55 a month

and nearly get them to the point where

they're breaking even to get the rest of

the way to our goal we could have John

and Jane eat out once every other week

or something instead of once a week that

would get their heads back above water

but it's not gonna do much to move the

needle for them in terms of giving or

saving for their futures both of which

of course they haven't been able to do

at all given their current financial

situation it's also likely not going to

be sustainable let alone enjoyable for

very long because in order to get their

heads above water we're essentially

taking away most of the things that they

enjoy spending their money on which is

doubly tough considering there wasn't

much of that to begin with now it is

possible that John and Jane will be able

to find other things that they enjoy as

much if not more so

don't cost them money at all as I've

discussed in previous videos and if

that's the case then they could turn all

these seemingly negative cuts into

blessings in disguise but if they don't

manage to do that then they're likely

headed for a swift failure by

approaching their budgets this way

another thing that they could do is work

some extra hours that would get their

heads back above water or possibly

without having to cut any of their

expenses like we did before and that may

very well work if they can consistently

get the hours that's not really saying

much because they are making good money

1 or 2 hours of overtime per week would

probably be enough for them to break

even but again this wouldn't do much in

terms of moving the needle when it comes

to their savings at their current level

of expenses assuming they were to retire

today they would need to have over 1.5

million dollars in order to be

considered financially independent

according to the 4% rule given that they

currently have zero retirement savings

they will need to be investing about

$500 a month at an average 8% annual

rate of return for the next 40 years to

reach that goal if they're young and

just starting their careers with no

desire to retire early that may very

well be fine but if they're older they

may not have that much time so while the

plan may work well in the short term

when it comes to just getting their head

above water financially it would be more

ideal if we could target those areas

that are costing John and Jane the most

and try to optimize them in order to

free up more money and make reaching

financial independence easier so let's

start with their housing because nearly

60% of their budget is going towards it

every month so we have a great

opportunity to free up some serious cash

there's not a whole lot that they can do

to affect the going rates for rent in

their area but depending on their

situation they may be able to move

somewhere cheaper and significantly

slash their housing expenses that way

but that's understandably not always a

viable option for all of us if that's

the case then what they may need to do

is take advantage of some sort of rent

hacking whether that's by doing

something like buying a triplex

somewhere in the area living in one unit

and renting out the others or just

living with additional roommates and

splitting the cost of the apartments or

renting out their house if they had that

on Airbnb or somewhere similar whatever

the case may be it could significantly

improve John and Janes financial

situation without ever actually having

to cut anything from their budgets or

eventually having to kill themselves

working so much overtime week in and

week out for 40 years long so

they could save that $500 a month but

anyway after utilities are included John

and Jane are currently paying about

three thousand dollars a month for their

apartments after a little searching they

find a three-bedroom apartment that

would cost them roughly five thousand

dollars a month after utilities are

accounted for as well as some good

roommates that they can split the costs

with this makes John and Jane's portion

of the housing costs come in at sixteen

hundred and sixty-seven dollars a month

this not only gets their head above

water financially but it also gives them

quite a bit of money about twelve

hundred and fifty dollars a month in

this hypothetical scenario to either pay

off their debts and further lower their

expenses going forward or to save and

invest each month even if we assume the

balances on their debts are twenty five

hundred dollars on the credit card ten

thousand dollars on the car alone and

fifteen thousand dollars on the student

loan with interest rates of fifteen

percent on the credit card five percent

on the car and four and a half percent

on the student loans they could be

debt-free in this scenario in just one

year and two months thanks to the money

that they've now freed up from their

rent hacking they could do it even

sooner if they picked up some extra

hours during that time or sell some

things to kickstart their process or

both but even without that after paying

off all their debts John and Jane would

have about two thousand and fifty

dollars a month left over after expenses

to give save and enjoy all because they

chose to take advantage of the 8020 rule

of money with their budget and

controlled those few vital categories

that were truly damaging their financial

present and future what's more is that

in addition to having so much more money

left over than they had before they

would also have a much easier time

reaching financial independence with

this new arrangement now that their

expenses have been lowered from about

five thousand and seventy five dollars a

month down to about twenty nine hundred

and fifty dollars a month they would

only need roughly eight hundred and

eighty five thousand dollars in savings

to be considered financially independent

according to the four percent rule

instead of the 1.5 million that they

needed before hypothetically if John and

Jane invested half of their leftover

cash each month or a thousand

twenty-five dollars towards their

retirements and got that same eight

percent return on average they would

become financially independent in twenty

three years and six months instead of

the nearly forty years that it took them

before if they were to invest all of

their money

that they had left over they would cut

that time down even further becoming

financially independent in just 16 years

and seven months one way or another

that's quite a big difference if you ask

me especially considering that it came

from just a couple of small tweaks to

their budget so that's the Pareto

principle and how I think it can help us

look at our financial pictures with a

little more clarity but what do you

think about the idea do you think it

could help you on your own finances are

there any other benefits to using this

rule for our budgets that you think I've

missed let me know in the comment

section below and thanks for watching