Could You Use The Pareto Principle To Budget Better?

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As a leader of a small business, you’ll quickly become familiar with a number of management strategies which help you to run your operation in the smoothest and most efficient way possible – and one of these is the Pareto Principle. Put simply, this states that you’ll 80 per cent of your results from just 20 per cent of your actions, and identifying this twenty per cent and focusing on it is key to time management and successful business. The interesting part is that once you’re familiar with this idea, you can see it popping up in other areas of your life. And it’s also a great one to apply to money management of your personal or business finances as well.

Adapting 80/20 For Your Budget

Everyone’s personal budget and financial situation are different, so there isn’t a set template for applying the Pareto Principle to your own money, but you can take the principles and use them to cut down on expenses and save more cash. The mistake that people often make is focusing on the 20 per cent of discretionary expenses and ‘luxury’ spending when they’re trying to save money. And while that isn’t a bad idea, you’re going to get far more results when you shift the focus to the 80 per cent of your money that is caught up in things like the rental or mortgage payment, utilities, food and other essentials. Listing out these baseline expenses can help you to see where you could achieve a better deal simply by comparison shopping. Things like comparing car insurance quotes and electricity suppliers to make sure you have the absolute best deal going are crucial. Often, different price comparison engines have different deals in place, so cross-reference two or three to make really big savings.

Tackling The Big Issues

If you have a lot of debt from starting your business, you may want to consider snowballing the debt by focusing all your efforts on paying off the one with the highest interest off first while taking a payment holiday or making the minimum repayments on the others. You could also try consolidating the debt by securing either a credit card with 0% APR or a low-interest loan and using it to pay off the other debts – this is only advisable if you can commit to maximum repayment you can afford and clear it down before the higher rate interest kicks in, but it can really help you to make inroads on money that you owe and help to free up capital quickly.

Making Investments

Another area where you can apply 80/20 is when it comes to investments and your overall portfolio. Split your money so that 80 per cent is invested into low risk profile, steady returners such as index funds, blue chip corporation stock and mutual funds which track the market. These are the workhorses that won’t offer stellar returns but will keep you ticking over. The remaining twenty per cent you can put into high-risk, high-returns strategies in investments or even in things like art or fine wine. Having some security while also giving yourself a few options which could yield a lot of profit is a great idea and will help you to balance the books.


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