Pareto’s Principle (80/20 Rule)

Pareto’s Principle (80/20 Rule) of Personal Finance

The 80/20 Rule means that only a few things are vital (20 percent) and the remaining are trivial (80 percent).

You have probably seen many examples of this in business where 80% of a given problem are only caused by a few things…

or 80% of your company’s sales may be with only 20% of your key clients.

The point of the Pareto principle is to suggest that you focus your energy on the 20 percent that really matters.

the 80/20 rule was developed by italian economist Vilfredo Pareto to describe the unequal wealth in his country, observing that 20 percent of the people owned 80 percent of the wealth

we wear our 20% most favoured clothes about 80% of the time, we spend 80% of the time with 20% of our acquaintances

In computer, resource optimization by observing that 80% of the resources are typically used by 20% of the operations

In software engineering, it is often a better approximation that 90% of the execution time of a computer program is spent executing 10% of the code (known as the 90/10 law in this context).

In business, dramatic improvements can often be achieved by identifying the 20% of customers, activities, products or processes that account for the 80% of contribution to profit and maximizing the attention applied to them.

Note, however, that sometimes adding up to 100 is indeed meaningful. For example, if 80% of effects come from the top 20% of sources, then the remaining 20% of effects come from the lower 80% of sources. This is called the "joint ratio", and can be used to measure the degree of imbalance: a joint ratio of 96:4 is very imbalanced, 80:20 is moderately imbalanced, and 55:45 is just slightly imbalanced