Let us first understand what is 80/20 Rule ? It means that 80 percent of your outcomes come from 20 percent of your inputs. It’s also called “law of the vital few” or Pareto principle . This rule applies to almost all the areas of life, even though it’s called 80:20 rule , the main idea of this principle is that a large part of outcomes are result of a few number of actions and 80:20 was the best fit for most of the things. A very simple example of this rule is that 80% of the world Wealth is owned by 20% of population . Let us see some example to understand this rule .
- Look back at your exams , 80% of your marks came from the studies you did on 20% of the days
- If you are coder , you will accept that 80% of the execution time is taken by roughly 20% of the code .
- Even on this blog , 80% of the comments are written by roughly 20% of the readers
- Also 80% of the total comments are from 20% of the total articles .
- 80% of the recognition your get is for a small amount of work (20%) you do .
- 80% of sexual satisfaction comes out of 20% of total time spent .
- Most of out worries (80%) are result of small number of problems (20%)
- 80% of the Assets under management is with 20% Mutual funds .
Some Examples from Financial Life
The same 80:20 rule applies to our Financial Life too ..
- 80% of the good returns we get is from 20% of good investments we make or 20% good decisions.
- 80% of the money lost or opportunities lost are result of the 20% small things we didn’t took care of .
- 80% of the money we could have made in Stock markets are due to those 20% of the times we didn’t take the risk.
- 80% of the Financial Planning clients are handled by 20% Financial planners (individual or companies) in India .
How to change our way of thinking
There are many small things in our financial life which looks very small , but we don’t concentrate upon them and don’t appreciate the impact it can have on our financial life , some of the 20% things which we don’t take care of are
- Budgeting : A nice article on Budgeting from PV Subramanyam
- Planning for goals by writing it into a piece of paper.
- Reviewing our asset allocation and performance of investments every year
- Keeping track of Documents
- Keeping our expectations low or realistic
- Not spending time on increasing your knowledge
These are 20% part which if taken care properly can greatly improve the performance or your returns (at least mental satisfaction) by great deal . We concentrate mostly on things like strategies , “finding best funds” , “finding cheapest plans” , “finding the easiest way to maximize the returns” , but these are 80% part of process which accounts for less than 20% of the success .. Just ask yourself
- How many times have you made money from the best stock tip or best Mutual funds for the year
- If finding the best plan (term plan , ULIP , or any other product) was so easy and clear , why is there so much competition and confusion.
You have to understand the real goal of financial planning first and then identify the areas you really need to concentrate on .
Here is a 1 hour talk on “Behavioral Finance : Role Of Psychology” from Yale University . Have a look
Comments , please share your views about 80:20 rule . Can you give some other real life example ?
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{ 34 comments… read them below or add one }
Hi Manish,
nice to see very informative articles. i need to save 1 lac in next 6-7 months for House. Could you pls tell me where should i invest of 15k montly to get good return with moderate risk.
I am thinking of top debt MF to invest? Please advise.Thank you.
Prashant
Just investing for 6-7 months will not fetch you any decent returns unless you take risk , which is not recommended anyways as this is important goal and you cant risk money ,.. I can think of nothing other than FD’s here .. If you can take some risk , better put money in top debt oriented mutual funds : http://www.jagoinvestor.com/2009/11/list-of-best-debt-oriented-mutual-funds-for-2009-2010.html
can you take more risk than 10% loosing money ?
Manish
90 trillion – The number of emails sent on the Internet in 2009. and 81% is spam….
check this out http://royal.pingdom.com/2010/01/22/internet-2009-in-numbers/
Cheers
Marshal
90 trillion – The number of emails sent on the Internet in 2009. and 81% is spam
check this out http://royal.pingdom.com/2010/01/22/internet-2009-in-numbers/
Cheers
Marshal
Marshall
Great information
Manish
Liked this 80/20 Pareto principle. So what do you think which side of 82/20 would this post be (in terms of comments).
seems like too much of 80 & 20 in my comments!
But anyway I don’t agree totally to 80/20 thing. Take for eg this post- if it falls in top 20% posts which makes 80% of your comments, the other 80% posts have also contributed in its popularity. Similarly in investments its 20% which gives 80% profits is just because you knew that the other 80% was dud or learnt a lesson because of that & then invested in this 20%. So the other 80% has also contributed some way in your profits but probably cannot be quantified.
.-= Amit Kumar´s last blog ..6 Commonly used Financial Calculators =-.
Amit
Its still early to tell which side it will be . Your reasons are valid , however the rule still applies not matter what the reason is , thats what 80:20 principle is
Manish
That was an interesting article. To understand and think through the applicability, need to read this again. Somehow, I am not convinced completely with this. But again, I may be wrong… let me re-dig this
.-= Mohan´s last blog ..Decoding Financial Advisers – Part 1 =-.
Mohan
There might be cases when 80:20 does not apply, it may be 90:10 or 95:5 or may be 70:30 .. but the inherent idea remains the same in almost all the areas
Manish
“80% of sexual satisfaction comes out of 20% of total time spent .”
You naughty
Pradip
Well .. this is one area I think 80:20 really fails .. the better ratio is 99:1
Manish
Ah.. this is refreshing one. I recalled my participation on a ‘work-smart’ program and how the instructor introduced this 80/20 rule which applies almost to everything in life. thanks for elaborating its usefulness in financial planning.
.-= Jagbir´s last blog ..Disable ssl ver 2 in apache for pci compliance =-.
Jagbir
Can you give some other example of this 80:20 rule , especially from our domain . What do agree that small things we ignore add up and affect the performance drastically
?
Manish
Ya Manish, its true that small things we often forget to give proper attention can cause bigger impacts. some examples of 80/20:
20% of employees are responsible for 80% of a company.
20% percent of customers are responsible for 80% of the revenues.
80% of the profits made in your industry are made by 20% of firms.
20% of the world’s population controlling 82.7% of the world’s income.
We spent 80% of our income in 20% of things (like rent,fee etc.)
We wear our 20% most favoured clothes about 80% of the time.
We spend 80% of the time with 20% of our acquaintances.
some more…
20% of the bugs cause 80% of the crashes in software.
20% of the features cause 80% of the usage in software.
80% crime in country is done by 20% of criminals (in big picture).
80% of work in kitchen is done using 20% of vessels.
Lastly, don’t think the Pareto Principle means only do 80% of the work needed. It may be true that 80% of a bridge is built in the first 20% of the time, but you still need the rest of the bridge in order for it to work. It may be true that 80% of the Mona Lisa was painted in the first 20% of the time, but it wouldn’t be the masterpiece it is without all the details. The Pareto Principle is an observation, not a law of nature.
here’s one fellow stating that 80/20 is not entirely correct: http://blog.davidwurtz.com/why-the-80-20-rule-is-wrong
.-= Jagbir´s last blog ..Disable ssl ver 2 in apache for pci compliance =-.
JaGbir
thanks for the nice list of examples . I agree that rest 80% of the work is important and should be done , but once we complete the first 20% part . The problem is that most of the people ignore 20% part at all .
Manish
Hi
80-20 is now wrong in any sense What it emphasis on that we are more happy/effective to do some task ,some relatioship ,but we used to spend too little with them ( too many tasks , too many relations , too many activities -doing bit of these ,bit of that ,…..)
It emphasis o identify those 20% activities , relationship which gives you maximum happiness ,satisfaction ,achievement & than increase the time spend on those activities ( 3 times say) & you will be very happy ,effective
Hopefully I am able to put my thoughts
But thes source you can find it here
http://www.the8020principle.com/
Regards
Rohit
I feel you wanted to write “80-20 is not wrong” but you wrote “now”
correct ?
Anyways you have nice points . good work .
Manish
Yes Manish typo error
Thanks for correction)
Hey very interesting article. I never knew about this 80:20 rule. Will google it and get some more info.
Also another thing which amazed me was it takes 21 days to form a habit. So if you want to change a habit or form a new one, you have to stick to 21 days rule and it is really difficult, even though 21 days sounds quite easy.
Keep up the good work !
Anu
Thanks for the comment . I do not very much agree with that 21 days rule . I tried it with my gym for 9 months and still its not my habit
. hehe
Manish
I liked one point from PV Subramanyam’s blog; Write down the Cash Spending cos cash disappears. Why I like it?
1. Disappears is the right word. Cash really does that.
2. logging your expenditure. This is one age old habit which will stand test of time. And I totally agree it. But there are many who laugh at this habit or ignore it or simply REJECT it.
Log your expenses guys. It ALWAYS helps!
Mukul
Correct , the problem is not less money , its using your money and tracking it and utilizing it in efficient manner . Most of us take care of every thing which comes in our life and in the process many “needs” are compromised for “Wants” . That should not happen
What do you say ?
Manish
Yes Manish cannot agree any more on this one.
The difference between being Rich and wanting to be Rich; is the will to go extra mile and spend time on money before we spend money itself.
So a not so rich dhirubhai can build/multiply/scale wealth. Cos he started somewhere and persisted.
Think,Revise,Scale,Act…!!
Yep , correct
Manish
I was watching ET’s Investors Guide. And a viewer has posted some query on how to get Term insurance.The expert listed down some 3-4 points on hows and haves and haves not of it.
I am glad that what ever background work i did prior to taking my term policy, featured in there. And I want to thank Manish for educating me on Term insurance and introducing the split.
So Manish thank you so much.!!
Mukul
I am glad, now its your turn and teach others about it and advocate about term insurance , if they dont understand , bring them here on this blog . it will be mass charity
ET’s Investor’s Guide ! . is it a show or a Book ? any ecopy ?
Manish
It is weekly programme i think on channel ET.
And yes there are at least 15 new friends of mine who are tuned into your blog. They like it.
I was checking the forums and found that you have Shield policy for yourself. Did you also split it?
Mukul
No man .. I have not split it .The plan of split is such that I need to take one more .
Manish
at my age of 54 i m under insured by 40 lacs as per various advises. i have corpus of 10 lacs in various funds,equities and fd. what is the suggestion to get minimum 25000 pm at 60 putting altogether including 15lac retiring benefits?shall i take term insurence, put elss-ulip,pension funds etc?
Ashok
Getting 25000 per month (after tax) can be acheived using around 40-45 lacs . Considering that you have 15 lacs of retiral beniefits , you have 6 yrs in hand and you have to grow 10 lacs into 25 lacs . thats not easy . thats 17% return CAGR . Not that its not possible , but its definately not safe . I would say try to take less risk and settle with 10% return in this age . Invest in couple of Debt oriented Mutual funds + PPF (incase its going to mature by your are retired or you are already retired) and some part in pure equity , this alone can give you around 11-12% , but you can assume 10% to be safe . That will leave you with 32 lacs of retirement lumpsum and close to 18,000 month income , now either you have this choice or take more risk and try for 17% return which can be so risky if things go bad that you will have to settle for lesser income like 12-13k also .
manish
80% of marks can be scored by 20% of effort.
But, then, you need 80% of effort to get remaining 20% of marks [Assuming your examiner does not have problem giving 100%!]
NKanani
yes , but depends if u want another 20% or not .. i would rather spent another 80% time as 20% time in 4 different things and get 80% at another 4 places .. so spending 100% total and get 80% at 5 places , rather than spending 100% and getting 100% at one place
manish
Hi Manish
A very educative article but lot of people have down to the wire to and commented a lot about using 80 – 20.
All pareto said was related to quality control in manufacturing but now this is being used in all domains. So guys always don’t think 80 – 20, but think that ur small efforts are going to result in big achievements and vice versa
//Deiva
Deivasigamani
Thanks for the comment , true that little efforts result in the majority part of acheivement , now its upto us that we dont to get that extra 20% by putting another 80% .
manish