The Pareto Principal: How To Use The 80/20 Rule To Retire Earlier

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One way to give your retirement planning a boost is to take actions that drive the greatest financial results.

Apply the Pareto Principle — the 80/20 rule — to your money.  The Pareto Principle was founded by Vilfredo Pareto, an Italian economist in 1896.  Pareto, an amateur gardener, found that most of the peas in his garden were produced by just a few of the plants.

He observed this principle elsewhere.  For example, he also realized in Italy where he lived, 80% of the land was owned by 20% of the people.  He found this distribution ratio in other areas of industry, too.

Today this ratio is widely known as The 80/20 Principle popularized by Richard Koch’s 1999 book.  Koch noted many companies found that 80% of their business came from 20% of their customers.  So his advice was to focus on “magic 20%” to achieve more with fewer resources.

How do you apply this principle to your retirement planning? Take the steps to improve your finances that would far and above make the biggest impact.

Everyone’s top money moves are different depending on circumstances but here are a few examples to get you started:

  1.    Pick up your employer’s matching contributions

Many workers are relying on their workplace retirement plans to fund retirement. According to Employee Benefit Research Institute 2018 Retirement Confidence Survey, “8 in 10 workers expect their workplace retirement savings plan to be a source of retirement income, including half who say it will be a major source.” So I may be preaching to the choir.

Picking up an employer match is widely known as “free money.”  Are you getting yours? Consider this: If your employer matches 50 cents for every dollar you put in (up to a maximum,) you are essentially receiving a 50% gain for your investment.

Where can you get a “50% gain” on your account in one year?  It sounds too good to be true, doesn’t it?

It’s not. It’s your employee benefit. Take advantage of it.

Financial planner tip:

Call your HR department or go onto your internal HR site and increase your 401(k) up to at least the employer’s matching contribution.

  1.    Set up an automatic investment plan

Put your savings and investing on autopilot.

Productivity expert, Mark Joyner, suggests using a concept called  “Kankyo Kaizen” which refers to continually improving one’s surroundings to improve your quality of life.    In other words, set up your environment for success.

Joyner suggests:

  • “If you have trouble getting up in the morning, move your alarm clock to the other side of the room.  
  • If you want to work out more, lay out your workout clothes the night before.  
  • Improve your environment in ways that make it easier to meet your goals.”

You can use this concept to build wealth.  Save and invest more with ease by setting up monthly automatic investments plans from your bank account to investment accounts.  This is exactly how your 401(k) works because your payroll deduction forces you to pay yourself first. Mimic this with your savings and investment accounts outside of your 401(k).

Financial planner tip:

Choose an amount you can easily do so you don’t end up canceling!  For example, if you think you can save $300/mo. choose $100/mo. to start with instead.  Then set yourself a reminder to increase the amount at regular intervals. This way you have a better chance of sticking with it for years.

  1.    Pay off your credit cards in full every month

If you pay off your credit cards every month, you never pay interest on your purchases.  

When you carry revolving debt month over month, it can get expensive. According to a February 2018 report by Creditcards.com, “the national average card APR is 16.41% and the average credit card balance is $5,472 as of Q1 2018.  Though down slightly from 2017, 38% of US households carrying debt according to the National Foundation for Credit Counseling Financial Literacy Surveys.

Interest charges on credit card debt can be a huge drag on your finances like trying to swim with your tennis shoes on. It’s much harder to get ahead.

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