Pareto Principle(The 80/20 Rule)
The Pareto Principle, also known as the 80/20 rule, is a concept that suggests roughly 80% of effects come from 20% of causes.
Understanding this principle can help in prioritizing efforts and resources. By identifying the most significant areas that yield the most results (the vital 20%), individuals can focus their attention and resources on those aspects to achieve more impactful outcomes in personal finance.
Example: Let's consider a simplified example involving a person's wardrobe:
This person owns 20 items of clothing.
However, they find that 80% of the time, they wear just 4 of those items.
20% of Clothes = 80% of Usage
Here, a small fraction (20%) of the total clothing collection gets the most use (80% of the time). This simple application of the Pareto Principle illustrates that a few favorite or versatile clothing items are consistently worn, while the majority of the wardrobe sees much less use.
Understanding this principle might prompt this person to declutter their wardrobe, focusing on the clothes they wear most often and potentially freeing up space, simplifying choices, and perhaps even saving money by avoiding unnecessary purchases based on this insight.
Areas it can help in: Expenses, investments, decision-making, time-management
