POSTED BY January 28, 2010 COMMENTS (36)ON
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:
The same 80:20 rule applies to our Financial Life as well…
There are many small things in our financial life which looks very small but we don’t concentrate on them neither do we appreciate the impact it can have on our financial life. Some of the 20% things which we don’t take care of are:
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
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 ?
Upcoming Next article : “How to Choose a Financial Planner”