Pareto, or the 80/20 rule

I believe most of us have heard of Pareto Principle, also known as 80/20 rule, the Principle of Least Effort, and the law of the vital few). Named after Italian economist Vilfredo Pareto, who observed in 1906 the unequal distribution of wealth in his country, that is 80 percent of Italy is owned by 20 percent of the people.

The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial. You can apply the 80/20 rule to almost anything from saving money to investing and to the physical world.

You observed 20 percent of the suppliers are responsible for 80 percent of  supplier related concerns. You observed that 20 percent of the items or services you bought account for 80 percent of your monthly expenditure. Also, you observed that 80 percent of your success come from 20 percent of your efforts.

Understand the Pareto principle will help you to focus your energy on those items that account for most of your monthly expenditure if you are contemplating how to increase your saving. In addition, it reminds you to focus your time and effort on those 20 percent investment that bring you 80 percent of the return.

A Pareto diagram on monthly expenditure may look as below: