Saving money using the 80/20 rule - The Personal Growth Channel


Saving money using the 80/20 rule

Focus on your top expenses to save money!

I'm sure by now you have heard of the 80/20 rule, also known as the Pareto principle.  It states that approximately 80% of the effects come from 20% of the causes.  I've found this principle to hold up in my finances as well, with 85% of my expenses coming from my top 20 categories for spending.  So what does that mean?  It means if I want to save a lot, I need to focus on the top things I spend money on!

So let's dig in, the graph at the top of the page represents my current expenses, specifically the top 20 expenses that I need to focus on to reduce my spending.  So what things do I need to focus on to save the most money?

House Payments 18.1%
Groceries 12.0%
Charity 6.6%
Household 6.4%
Auto:Fuel 4.0%
Childcare 3.9%
Vacation:Lodging 3.4%
Misc 3.1%
Utilities:Gas & Electric 3.0%
Dining 2.8%
Medical:Doctor 2.8%
Clothing 2.5%
Gifts Given 2.5%
Interest Exp 2.5%
Tax:Property 2.4%
Utilities:Telephone 2.3%
Other Vacation 2.2%
Depreciation 1.8%
Auto:Service 1.7%
All Other 15.7%

Your results will be a little different, but you can immediately see that the top 5 items take up a huge chunk of my expenses.  There are some things that I didn't include like child support and income taxes, but this gives you a pretty good idea.

So how does knowing this help?  Well, if I want to save a significant amount, knowing this information tells me where I need to start cutting!  If you are not already tracking your expenses in a program like Quicken or Money, you need to start doing so immediately if you want to take advantage of things like this!

So let's dig into the data a little.

Housing

The first thing I see on my list is House Payments.  Scanning on down, I notice that Household (repairs/maintenance), Utilities, & Property Tax are all directly related to this, this single item accounts for at least 30% of all of my expenses.  Wow, that's a lot!!!  What could I do to reduce those?  I could increase the term of my loan, that would help my cash flow in the short term, but will likely increase my interest expense over time.  Since my cash flow is OK, I'm not going to do that.  I could sell my house and get a smaller one.  If I was hurting for cash or didn't have 5 kids, I would certainly do that.

Housing is one of the biggest expenses you have, if you want to reduce your monthly expenses, seriously consider moving!  The neighborhood you live in will also influence other expenses, move to an affluent neighborhood and all of a sudden you feel like you need a new car, maybe some nicer clothes, little Johnny needs a new bike, all just to fit in.  Before you know it half your income or more is going to keep up with the Jones!  Live in a neighborhood where you are richer than most of your neighbors and you'll be able to seriously reduce expenses.  A smaller house is also easier to keep clean!

Groceries


Next on my list is groceries.  Ahh...groceries.  We have a large family, 2 adults and 5 kids eat a lot of food!  As a matter of fact, 12% of all my income is going towards that!!!  So what could I do to reduce my grocery bill?  Here are a few things that come to mind:
  • Meat is expensive, eat less meat!
  • Milk, we drink a lot of milk, around a gallon a day.  Might be able to reduce that.
  • Plan meals based on sales during the week.
  • Buy more store brands.
  • Remember to stick to the list when shopping!
  • Continue using cash, this is easier to keep track of and we spend less that way.
  • Use coupons more!

Vehicles


Car payments are a large expense for many families, you'll notice that didn't show up in my list, although fuel did because we drive a lot.  We long ago ditched buying expensive cars in favor of paying cash for reliable used vehicles.  I've personally sold newer cars to downsize in the past, and I am very glad that I don't have that debt hanging over my head anymore!

Look around, if you can't find a really nice looking very reliable used car for less than $5000 in the US, then you're not looking hard enough.  Look a little harder and you can probably even find something like an old Honda Accord that is built like a tank with around 100k miles for $2500.  Those big items really add up, make sure you are not pinching pennies on the little things and then wasting thousands on big items!

I think by now you get the idea.  Figure out what your biggest expenses are, and start brainstorming ideas on how to reduce those!


I hope this article was helpful.  If you are interesting in how to build wealth over the long term beyond simply saving, take a look at this article I wrote!  10 Steps to Creating Wealth

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Saving money using the 80/20 rule Saving money using the 80/20 rule Reviewed by Don Smith on 3/18/2016 Rating: 5
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