Pareto Principle (80/20 rule)

jzt83 · Post by **jzt83** » Mon Sep 19, 2011 10:00 am

"The Pareto principle (also known as the 80-20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes"

http://en.wikipedia.org/wiki/Pareto_principle
How can the Pareto Principle be applied to ERE?

Felix · Post by **Felix** » Mon Sep 19, 2011 10:26 am

Well, you focus on the biggest money drains and solve them first.
1)housing

2)car

3)food

4)travel/entertainment
There's a law of diminishing returns here. Moving to a smaller flat and changing from a car to a bike will do more for you than making your own soap and toothpaste.

C40 · Post by **C40** » Mon Sep 19, 2011 10:25 pm

I believe the main application, as mentioned, is that you can achieve the quickest spending reductions by focusing your efforts on your highest expenses.
There are other applications of the Pareto principle that can help, if indirectly. Consider the original discovery - that 80% of the wealth is owned/controlled by 20% of the people. Understanding that this is the natural way of things (at least is it on our planet for the last few thousand years) can help you, but probably in an indirect way for most people.
Some other examples:
-- For a business owner, understanding that 80% of your innovations or process improvements will likely come from around 20% of your employees could help you focus your efforts/coaching where it will help you the most.
uhhh, drawing a blank right now on others.. I may add more as I think of them.

m741 · Post by **m741** » Mon Sep 19, 2011 11:35 pm

From a pure ERE perspective, you can get 80% of the benefits from knowing 20% of a skill.
For instance, knowing the right 20% of cooking skills will give you 80% of the benefits.

JasonR · Post by **JasonR** » Tue Sep 20, 2011 12:02 am

chilly · Post by **chilly** » Tue Sep 20, 2011 3:37 am

FWIW, if you have decided you can't do without a car (as I have), you'd be hard pressed to find a single skill that could save you more money than servicing the car. That's WAY up in the 80% range (as @Felix rightly points out)
@JasonR lol.

Shandi76 · Post by **Shandi76** » Tue Sep 20, 2011 4:56 pm

@chilly - so true. I reeled in horror when I phoned to book my car in for a service and was quoted £320! If you want to keep a full service history (for possible resale benefits) you have to go to the original manufacturer, and the dealerships really charge over the odds for the privilege.

FrugalZen · Post by **FrugalZen** » Wed Sep 21, 2011 4:16 am

Pareto Principle....never heard it called that before...I always heard it called the "Law of Diminishing Returns"

AspiringYogini · Post by **AspiringYogini** » Wed Sep 21, 2011 5:18 am

I learned that this applied to business income and that 80% of your income came from 20% of your clients which is similar to what C40 said WRT employees. This allows you to concentrate your efforts at getting services correct for those who patronage does the most for your business as opposed to those who use the business less and complain.