The 80/20 rule of thumb is a simple approach to budgeting. Also known as the Pareto Principle, is an aphorism which asserts that 80 per cent of outcomes (or outputs) result from 20 per cent of all causes (or inputs) for any given event.
It looks at your take-home income, which reflects your income after taxes, health insurance premiums and any other expenses that are taken out of your pay check.
You put 20 per cent of your take-home pay into savings. The remaining 80 per cent goes toward your expenses.
Ideally, you put 20 per cent into savings as soon as you’re paid. The goal of the budget is to ensure you always pay yourself first.
In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority.
For instance, once managers identify factors that are critical to their company’s success, they should give those factors the most focus.
Although the 80-20 axiom is frequently used in business and economics, you can apply the concept to any field—such as wealth distribution, personal finance, spending habits, and even infidelity in personal relationships.
The rule is often used to point out that 80 per cent of a company’s revenue is generated by 20 per cent of its customers.
Viewed in this way it might be advantageous for a company to focus on the 20 per cent of clients that are responsible for 80 per cent of revenues and market specifically to them—to help retain those clients, and acquire new clients with similar characteristics.