What did you spend 60%, 70%, 80%, or even 90% of your time doing today? Did these activities move you closer to or farther from your larger life goals? Heck, if you’re like most people, you might not even know what those goals are. As we go about our daily tasks, it can sometimes take a while to get the results we want — but if we can find the right life “hacks,” this can speed up the process.
The principle I’m about to share with you is exactly one of those hacks. It’s a foundational “mental model” that can help frame the way we think, and if implemented, it can provide tremendous benefits to one’s productivity. I’ve known about this principle for quite some time but recently was reminded of its power.
Here’s how you can “hack” the system that many of us follow today, and start doing more with less.
If Warren Buffett, John D. Rockefeller, Elon Musk, and Charlie Munger walked into a bar… I would definitely want to be a fly on the wall with a tape recorder to capture that conversation! What do these four guys have in common other than being ultra-successful in their own areas of expertise? They all swear by what’s known as the “80/20 Rule” or something very much like it.
The 80/20 Rule, or Pareto’s Principle says that, for just about any event, 80% (or a majority) of effects are caused by 20% (or a minority) of causes.
Italian economist and amateur gardener Vilfredo Pareto came across this concept in the early 1900s when he noticed that 20% of his pea plants produced 80% of the peas. He later drew a parallel in economics, which led to his principal breakthrough. Here are a couple quick examples of the 80/20 Rule used in business and personal affairs — and it’s not about a strict 80/20 ratio. It could be 75/25, 82/18, or whatever. The idea is that a small portion of anything is usually responsible for most of the results.
• 20% of customers create 80% of revenue
• 20% of products account for 80% of sales
• 20% of staff cause 80% of the issues
• 20% of staff produce 80% of the productivity
• 20% of software bugs cause 80% of software problems
• 20% of relationships account for 80% of love, connection, and professional advancement
• 20% of our to-do list items account for 80% of our productivity
What’s really cool about this principle is that you can apply it to anything. Whether your goal is to have a net worth of $10M when you retire, start a new business, or have more time to watch your favorite sports teams, the 80/20 Rule quickly helps cut through the noise and shows you 1) where you might be wasting valuable time, and 2) a quicker, leaner way to get there.
When our team at Hughes started looking at how we could apply the 80/20 Rule, it created some unexpected breakthroughs in the way we spend our time. We realized where the REAL leverage was in what we do every day. Now, we are ruthless about prioritizing only the efforts that will lead to long-term wins for us, instead of getting bogged down in daily minutiae.
Following in the footsteps of some of the world’s most successful entrepreneurs, leaders, and investors, how can we apply strategies of the 80/20 Formula to help us understand and become more efficient in the allocation of our own assets: including time, money, health, relationships, and more?
Implementing the 80/20 Rule follows a pretty simple formula, though it can take some practice to get down to the nitty-gritty. I’ll tell you what, though — once you see it work, and once you realize how much time, money, or energy you can get back, you’ll have fun being the conductor on your own train.
Here are a few ways to get started:
Your renewed to-do list
Write down 10 things you need to do today. Now, single out the 2 items you consider to be the most important — your highest ROI (return on investment) activities. (They’re usually the ones we procrastinate about the most!) We have the tendency to want to get the “small things” out of the way before focusing on the more important tasks — the ones that can make the biggest difference in our lives — which is a big mistake. If you take one thing away from this article, it’s that the most important things should almost always be done first. When you wake up tomorrow morning, ask yourself, “What’s the one thing I can do right now that will drastically improve my day, and maybe even my life?” And do it right away!
Your business relationship revamp
In his book Rich Habits: The Daily Success Habits of Wealthy Individuals, author and financial consultant Tom Corley states that one of the top habits of wealthy people is that they’re selective about the people they choose to spend time with. And we’ve all heard the saying, “You are the company you keep.” Instead of casting a wide net at business networking events, focus on connecting with the 20% you really want to talk to, who challenge you, who get your gears turning. (Motivational speaker Tai Lopez suggests aiming for 33% as a similar metric, in his TedX talk here: Bit.ly/TedXTai). If it all works out right, you’ll be part of their 20%, too.
Your leveraged investment portfolio
This is the part I’m especially excited to write about! One of the greatest reasons to use the 80/20 Principle is that it gives you leverage. In any area you apply it, you find that you can suddenly squeeze more out of less. What better way to apply this than with your money?
I’m going to guess that you’re smart and that you value hard work and doing things yourself. But if you’re like most people, even by working 40 hours or more a week for twenty or thirty years at a job that pays well, most of us cannot work our way to riches! There might have been a time when that was true, but it just isn’t the case anymore. For many of us, the 80/20 Principle is working backward: 80% of our work and related income yields 20% or (even less) of our retirement and discretionary money, since the rest of it goes toward necessary living expenses and taxes — instead of 20% of our work and related income producing 80% of our retirement and discretionary money. There are plenty of retirement calculators online that show you how much you need to invest every month to live at only 50% or 60% of your current income, and the amounts can be staggering — particularly if you’re over 40 and have some catch-up to do.
There are some more obvious ways you can “80/20” your finances, though instead of trying to whittle away at the small stuff like your Starbucks coffee or health club membership, I’m going to suggest taking a broader and ultimately more effective long-term approach: investing. Using the 80/20 Rule, some suggest that you should invest 20% of your income. Although saving 20% of your monthly net income can be done, it would likely involve some serious cutbacks on things that contribute to your current quality of life.
The best way that I know of to “80/20” your money is to invest into assets that let you compound interest or return. I consider compound investing to be the “20%” of leveraging our finances. In fact, if you’re not regularly investing money in an account with compound interest, you’re literally throwing money away. To get you excited about compound interest, have fun with this online calculator: Bit.ly/CompInterestCalc
The real power behind the 80/20 Rule is that it gives you leverage, enabling you to become hyper-focused on the few things that will bring the most desirable results. What better way to experience this benefit than with your money and investments?