Saving money is one of the most basic financial principles in existence, yet so many people struggle to pull it off consistently. The Covid-19 pandemic has changed the way we think about savings after millions suddenly found themselves unemployed and unable to earn any income.
Getting through a financial emergency is one of the biggest reasons we need to save money. You never know when you’ll lose your job, face a medical emergency or need to make emergency repairs on your home or automobile.
While everybody is capable of saving money, financial habits are usually what dictate success and failure. If you find yourself unable to put money aside or simply want to save more each month, the 80/20 rule is one of the best places to start.
Also known as the Pareto Principle, the 80/20 strategy teaches you to use your limited time and resources to complete the few tasks that achieve the most significant results.
In other words, most things in life are not distributed evenly. In the case of the 80/20 rule, 80% of our results come from 20% of our actions. This ratio has been observed across so many facets of life:
- 20% of the work creates 80% of the outcome
- 20% of workers produce 80% of the outcome
- 20% of customers create 80% of a company’s revenue
- 20% of a company’s sales will generate 80% of its total sales
- 20% of the features cause 80% of the usage
- 20% of the population owns roughly 80% of the wealth
- 20% of your wardrobe is worn 80% of the time
- And so on
Of course, things do not always line up exactly 80/20. But if you carefully observe everyday life, you’ll quickly realise that most things are distributed this way.
So, how does this apply to savings? It all comes down to budgeting.
If you want to use the 80/20 rule to boost savings, go through your bank statements and identify where most of your money is spent (i.e., the 80%). Once you have identified these big costs, you need to find a way to reduce them.
For most people, 80% of their spending goes towards housing, transportation, bills and debt. If you focus on making changes to these areas, you will be in much better position to save money.
Whether you consolidate debt, rent out a spare room in your house or get rid of your car for public transportation, there are plenty of was you can maximise your savings each month.
It goes without saying that everyone’s financial situation is different. You may not be in a position to rent out a room in your house or sell your car, but there is always something you can do to reduce big expenses. Once you figure it out, you’ll have a much easier time saving money.
This strategy is much more effective than cutting out your daily coffee or canceling your Netflix subscription. If you are struggling to save money, consider the big expenses first and do what you can to reduce them.