We don’t always get what we give. At least, that’s what the Italian economist and sociologist Vilfredo Pareto discovered in the 1800s while harvesting peas from his garden. Pareto observed that 80% of the peas came from only 20% of the peapods, demonstrating an unequal relationship between inputs and outputs. Wondering if this pattern would repeat itself in other areas of life, Pareto began to look at different data sets to confirm his findings.
He looked at the distribution of wealth in Italy, observing that roughly 80% of land belonged to about 20% of the population. He found that 80% of a company’s revenue generally came from 20% of its customers, and 80% of all crimes and accidents were committed by 20% of criminals and drivers, respectively.
This phenomenon became known as Pareto’s law or the Pareto Principle. 80% of outcomes are the result of 20% of the inputs.
While this principle might skew and not always hold one hundred percent of the time, the general principle that 80% of effects result from 20% of causes holds. Less than 10% of the population owns 80% of the stock market. Few social media accounts are responsible for most misinformation across platforms. And we’ve recently seen, in a pandemic, that roughly 20% of the most infectious individuals are responsible for 80% of the transmission.
You can probably think of examples in your own life. Personally, writing is an excellent example of the 80/20 rule. I only spend a small portion of my day doing it, yet it generates the highest returns.
Knowing 80% of your success and results come from only 20% of your efforts; you can apply the 80/20 rule to your financial lives. Here are the five financial rituals you can focus on that will impact results the most.
Ritual No. 1 - Weekly Finance Time
Dedicate a little bit of time each week to tending to your finances. From reviewing your spending to handling the little administrative tasks, like getting your tax documents prepped. Committing at least 20 minutes to mind your money each week is a touchstone ritual for financial wellness. It’s one habit that creates a cascade of other good habits.
Ritual No. 2 - Save and invest a portion of everything you earn.
Save and invest a portion of every dollar you earn. 10% is good. 20% is great. 30% is excellent. Aim for excellence, but it's OK if you’re nowhere near that now. Just start where you are. Build the habit now, and you can adjust the amount later.
Put your savings and investment habit on autopilot by leveraging technology or setting up automatic distributions from your paycheck. When it’s automatic, you don’t have to decide with each paycheck. You make the decision once, and the process runs without you.
Saving and investing is an up-river solution that will eliminate and minimize a bunch of other down-river financial problems. For example, saving a portion of your income can eventually lead to having an emergency fund. This is cash available for unexpected expenses. Having cash on hand means you’ll be less likely to rely on credit cards in an emergency, which can ultimately mean avoiding stumbling into credit card debt.
Ritual No. 3 - Separate your spending.
When managing your spending, many paths lead to the same destination. Some people may enjoy using a budgeting app, while others, like myself, are keener on a loose spending plan.
A flexible spending plan requires keeping your essential and non-essential expenses in two separate checking accounts. I call the “bills & life” account the checking account for all the essentials, and the checking account for all the non-essentials, I call the “fun & bs” account.
Only pay for essential expenses, like rent, out of the bills & life account. And only use the fun & b.s. account for the non-essentials in your life, like going out to pizza with friends.
Separating your spending can impose a stop loss on your non-essential spending. It's a system for spending that creates a process and reduces the amount you’ll have to rely on willpower or making “good financial decisions.”
You will likely allocate whatever is left over from your paycheck after you’ve saved, invested, and allocated what you need for your essential expenses.
If you’ve done this for a while and you feel comfortable/you can trust yourself with using debt, you can use a credit card for your fun & b.s. expenses, but this might not be the right move for everyone.
A healthy spending habit gives your financial life more flexibility because it often means you have money to spare, which can be saved and invested. It’s another financial habit that pays dividends and has an outsized impact on your financial health.
Ritual No. 4 - Self-Reflection
Self-reflection allows us to understand how our thoughts, emotions, behaviors, and reactions impact our lives positively and negatively. When we know our strengths, weaknesses, and triggers, we can use that knowledge to make positive changes in our financial lives. We can become better versions of ourselves and create a healthier, more meaningful life.
Create a ritual for self-reflection that works for you. One common ritual is a journaling practice. Writing often helps us clarify our feelings and gives us an opportunity to make connections we might otherwise overlook. Find a ritual that works for you.
Self-reflecting is a ritual that can cascade and compound. The ability to self-reflect is important when making financial decisions. And since the quality of our choices impacts the quality of our lives, self-reflection has an outsized impact on our overall financial wellness.
Ritual No. 5 - Practice appreciating what you have.
The antidote to scarcity is gratitude. If you don’t appreciate what you have now, you’ll always find a way to feel like you never have enough. Gratitude isn’t a substitute for a living wage. It is a practice for improving the quality of anyone’s life.
A small, short, meaningful gratitude practice that takes less than a minute has a shockingly huge impact on how we feel. It’s truly one of the simplest rituals one can have that pays a dividend far beyond your initial investment.