You may have heard of “The Pareto principle” also known as the 80-20 rule It suggests the law of the vital few, and the principle factor of sparsity stating that, for many events, roughly 80% of the effects come from 20% of the causes. An Italian economist Vilfredo Pareto created a mathematical formula describing the unequal distribution of wealth he observed and measured in Italy. He found that roughly 20 percent of the people in his country dominated with 80 percent of the wealth.
This Principle has been adopted in management to help managers stay focused on the “20 percent that matters”. Of all the tasks performed throughout the day, one could say (based on Pareto’s Principle) that only 20 percent really matter.
Likewise in money management there’s a 10-10 80 rule to help in budgeting. John D. Rockefeller an American industrialist was the wealthiest man of his generation. When asked what the secret of his financial success was, he gave a profoundly simple answer – he followed the 10-10-80 principle. John gave the first 10% of what he earned to God, the next 10% to savings, and then he lived within his means on the remaining 80%. From his very first paycheck, Rockefeller tithed ten percent of his earnings to his church. As his wealth grew, so did his giving, primarily to educational and public health causes, but also for basic science and the arts.
The 10-10-80 principle recommends that
10% savings and investment
If you have been consistent in following your budget then you should increase your tithing and giving to 15%, savings at 15% and living on 70% or less. The goal is to leave on less and increase on the other two categories.
In the coming days we will be discussing these categories in details.