Have you ever noticed that a large portion of our lives are dominated by a small portion of things? It’s called the Pareto principle or the 80/20 rule. 80% of our lives are ruled by just 20% of the most important things. My mother was a high school math teacher, and she would spend 80% of her time dealing with 20% of her problem students. This is just one simple example of how the Pareto Principle is at work in our lives.
There are so many more examples of where the Pareto Principle dominates factors of our lives. And, the Pareto Principle extends to our finances as well. Whether you are a consumer or as an investor the Pareto Principle makes its way into our lives whether we like to admit it or not or we even realize it.
How Much Clothes Do You Wear From Your Closet?
Have you ever look at how many pieces of clothes that you have in your closet? I hate to admit it, but I have almost just as large a closet as my wife. I have just as many shirts, jeans, slacks, and suits as she has dresses, shoes, and purses. Looking at my closet though I can see the Pareto Principle alive and well.
When I try to decide what shirt to wear in the morning I find myself gravitating towards a certain select few. When in fact, 80% of the time I select only 20% of the shirts that I own to wear day to day. It is the same 20% of the shirts in my closet that I wear day in and day out. While this may not tied directly to personal finance, it does show that we do spend an enormous amount of our money on many things that we don’t even use.
How Many Television Channels Do You Watch?
How many television channels do you have that come with your cable package? Or, how many television channels do you get from your satellite TV? Inevitably Americans watch a lot of TV and have access to a lot of television channels.
But, how many do we really watch? The Pareto Principle is alive and well in our television watching patterns. I am willing to bet that most of us have several favorite television channels that we watch consistently.
Even most televisions today have buttons right on the remotes to help us identify, remember, and easily return to our favorite television channels. I am willing to guess that most of us have about 10 or maybe even 20 favorite television channels. But, if we have almost 200 channels to choose from, we are not even spending 80% of our time watching 20% of the channels that are available to us.
Instead we are only watching 10% the channels out of the 200 that are available to us. We are not even getting to 20%. Can you get by with the smaller cable package and still continue to watch the same amount of channels that you normally typically do during the week? I’m willing to bet that you can if you just simply admit that we are a victim of the Pareto Principle.
What’s In Your Fridge And Pantry?
I am ashamed to admit it, but my wife and I are constantly throwing out spoiled food from our refrigerator. We don’t mean to do it, but we seem to let a lot of fruits, vegetables, and meats expire before we use them. This too is a function of the Pareto Principle.
We buy so much and so many different types of foods when we go grocery shopping. Whether they go into our fridge or are stored in our pantry, we have a lot of variety in our food choices to choose from. It is because we buy a lot of variety at the grocery store.
Suffice to say that we typically still only eat 20% of the food that we buy 80% of the time. We all have our favorite foods that we love. We continue to gravitate towards those foods even though we may buy other things that are on sale or that tickle our fancy while walking down the aisle. Unless we become acutely aware of the Pareto Principle in our spending and our consuming habits, we may continue wasting money on things that we seldom use.
How Many Toys Do You Have?
Have you ever noticed how many toys our children have? We are of course enormously blessed in America. I am always reminded of just how blessed when I look at how many toys my children have cluttering the floors in their rooms. My wife is constantly complaining about how messy their rooms are every day. And, when I survey the devastation that is my children’s rooms, I am confronted by the Pareto Principle yet again. There are tons of toys scattered across the floor, but of course, there are only a few select favorites that they play with regularly every day.
I dread the thought of counting just how much money we have spent just on toys that our children don’t play with. Many of these toys are thought of in such high regard during Christmas or just after birthdays, but they quickly are thrown to the wayside when a new toy comes along. And, like the Pixar movie Toy Story, which has shown us that very few new toys can compete with our children’s most beloved toys like the main character in the movie, Woody. This again shows us the Pareto Principle hard at work and interwoven throughout our lives.
The Pareto Principle is a stark reminder that we inevitably waste money. Whether it is the shirts in our closet or the toys in our children’s toys boxes, we inevitably waste our hard earned money. We spend 100% of our money only using 20% of our purchases 80% of the time. While this may or may not be a stark realization of our inefficiency, it is definitely an eye-opening realization nevertheless. While I don’t know if we can change our human nature, it is definitely something to be cognitive of as we continue to make purchases and go through life.
What about you? Have you seen examples of where the Pareto Principle dominates factors of your daily life and how you spend your money?
11 thoughts on “How To Use The Pareto Principle To Save A Ton Of Money”
Never heard of this pareto thing. INteresting and very true. Even true for my tools. Of cousrse the 80% that I don’t use all the time is because they’re useful for special jobs, so I can’t exactly get rid of them becuase I do need and use them. Just not often. The hammer and power drill get used the most.
Maybe there is an alternative to buying those 20% of the specialty tools though. Maybe you can rent them or borrow them and safe money instead of having them collect dust in your garage because you only use them 20% of the time.
Good post on using the Pareto principle and it’s implications. It can be easy to overlook the things that we have or buy but really don’t use and are thus a waste of money.
I never really thought about all of the things that we have bought that sit unused. It is quite a lot when you stop to think about it.
Very interesting! And..right on point. I have just recently downsized in clothes for my girls and myself. We were such a small handful!
I actually work really hard to keep my wardrobe to the minimum- if something new gets brought in, something old must go out, etc, and yet, I still find myself gravitating to the same outfits week in and week out. Some day, I’ll finally get myself down to the 6 piece clothing diet, but I’m not there yet.
As for cable- I totally agree with you. Sadly, the stations we watch the most are only on the HD expanded package. I would love it if my cable provider let me have an a la carte menu for channels. My house would have maybe 15.
A la carte cable is coming. It might be a few years away, but eventually that will be the standard. Mark my words…you heard it first here.
This principle is why we got rid of cable. We only watched 20% of the channels but paid for all of them.
I’m seeing that more and more with my own cable watching patterns.
I HATE HATE HATE cable packages. I use way less than 20% of the channels (I think there are about 5 that I watch regularly, a couple more during sports seasons). What I want to see is a company offer a pay-per channel package, where you hand pick the channels you would like to pay for, and that’s all you get. They can keep their cadillac packages as well, and price the pay-per channel packages such that past a certain number of channels (maybe somewhere around 20-30?), it’s more economic to go with the standard package. But for those of us who only watch a handful of channels, it would be so much better!
Wow, I’ve never heard of the Pareto principle before but it totally makes sense. It’s amazing how much money (and time) one can save by simply getting rid of the unnecessary. It made me think about my way of life and I have to say I am a victim of the principle most of the times. Great article, Hank!