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 you get is for a small amount of work (20%) that you do.
- 80% of sexual satisfaction comes out of 20% of total time spent.
- Most of our worries (80%) are a result of small number of problems (20%).
- 80% of the Assets under management is with 20% Mutual funds.
The same 80:20 rule applies to our Financial Life as well…
- 80% of the good returns we get is from 20% of good investments we make or 20% good decisions that we took.
- 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 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 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:
- Budgeting: A nice article on Budgeting from PV Subramanyam
- Planning for goals by writing it on 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 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.
<br /> <a href=”http://answers.polldaddy.com/poll/2607278/”>Do you agree with 80:20 Rule ?</a><span style=”font-size:9px;”>(<a href=”http://answers.polldaddy.com”>trends</a>)</span><br />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”