Here is an except of my previous book 10x Your Life!
The Pareto Principle is a concept in management theory named after an Italian economist by the name of Vilfredo Pareto. Although originally articulated as theory about land and population distribution, it has been extended to many natural phenomenon, including several processes in business management.
When applied to life in general, the Pareto Principle suggests that approximately 20% of everything you do creates 80% of your results. This has actually been proven time and again in various industries and it’s true for your life as well.
In other words, most of your positive results come from only a relatively small percentage of your actions.
Think about your clothes, do you wear all of them? Do you even wear close to all of them? I bet if you went through all your clothes and donated the ones you don’t wear you would realize that you only actually wear around 20% of what you own.
Take 30 minutes this week and go through your clothes. Be very honest with yourself and put the ones that you don’t normally wear in one pile, and toss the ones you do in another.
After you have separated your clothes into two piles, go back through the ones you decided you would keep. Filter through them one more time and really think about if you are just keeping it because you like the shirt but don’t ever wear it. Remove those from the keep pile and donate the clothes you decided you don’t normally wear.
The act of sorting your clothes in this way is going to be helpful to teach you the 80/20 principle in practice. Once you understand how it works on a tangible level, you will be surprised how important this principle is when it comes to focusing your energy in an effective way. This goes for job applications, finances, studying, you name it!
If you just sent your resume to every job out there, don’t you think you would be wasting a lot of time? It would be much better to identify what skills and experience you have and then identify which jobs out there are seeking someone like you. Then you only apply to those specific jobs.
For your finances, a lot of people try to spread themselves out into a ton of areas, but this is not always the best idea. A better strategy is to try out a ton of different investing methods and follow which ones are bringing in the most money.
I guarantee you that in your portfolio there are 1 or 2 huge revenue growers and the rests are duds. Once you identified which 1 or 2 bring in 80% of your profit, scale those strategies and get rid of the rest.
Take 30 minutes and look at your finances. If you have multiple sources of revenue, working multiple jobs, investments, anything, determine which is your smallest revenue generator. Then assess how much time you are spending on that task. You need to think about this from a return on your investment perspective. The investment being your time and money, the return being your income.
If that investment is appropriate for the income you generate then keep it. If not, get rid of it. Also, if there is a clear distinction from your larger revenue generator and your smaller ones, determine if you should just put more time and money into that and just get rid of the rest.
Another way you can apply this is with your expenses. Look through your income statement, and identify where you are spending the most money, food, entertainment, gas, ect. Determine if that is something you can live without, if it is, get rid of it. If you do this a few times you will be able to maximize your revenue and minimize your expenses.
If you are not using the Pareto Principle you are losing tons of time and money.
Studying is another great example. In Law School tons of people read cases and go to class diligently, but from my experience this is generally a massive waste of time. A much more efficient strategy is to build an outline yourself based off someone else’s outline (sometimes you can even skip making an outline based on your class) and then start taking exams.
The number one way to study for your Law School exams is to just take all of the last 20 year’s worth of state bar exams.
The reason for this is that it improves your knowledge of the material because you look at the answers, take notes, and update your outline. And, it improves your writing style because you can mimic the top answers from previous bar exams.
Instead, other students are spending countless hours reading hundreds of pages a night just to keep up with class. They go to class to learn nothing and then they go home and read more. But likely only 20% of the material they are trying to learn is relevant to the bar exam.
What a waste! They must not know about the 80/20 rule.
One thing that no one tells you about the 80/20 rule is that you can take it even further. Once you have identified the few inputs that are bringing the most outputs, you can keep 80/20ing.
For my investing, I used the 80/20 rule for my option strategy. At first I was buying and selling calls and puts for several different companies. I quickly realized that selling brought in more profit then buying and switched to only selling puts and calls. Then I realized that selling calls was more profitable for me then puts so I only did calls. Then, I realized that only a few companies were bringing in the most profit for me so I only traded those securities and made a killing.
This is a great example of why the Pareto Principle is so powerful. I identified my strongest revenue grower, increased it, and got rid of extra expenses.
But, most people just stop the first time they use the 80/20. Instead of doing what I did, a lot of people would just identify their top revenue grower and scale it.
What I want you to do is never stop using the 80/20 principle. Figure out what’s working the best and focus on that, then A/B test out something against it and keep 80/20ing till you are satisfied with everything.
In my example, I tested selling vs buying, then I tested out calls vs puts, then I tested companies against each other, then I tested out different expirations, and so forth. I ended up with a really profitable strategy and made a ton of money.
Consistency is key. You can’t just do something every once in a while to get amazing results. You need to do it daily. For trading, studying, whatever you need to do to get your desired result — you need to be consistent with your practice.
Once you use the Pareto principle to determine how to effectively get the best results from your input, you won’t turn back!
Putting the 80/20 Principle into Practice
I suggest setting aside the exact same time every day to do your tasks for a specific goal. This is the best way to leverage your subconscious to work for you and harness your body’s inner clock.
The problem most people have is that they create these amazing goals but then when they go out to work on them they burn themselves out because they put way too much effort in all at once. Instead of realizing that results take time and the best results come from small inputs every day, they think if I put in a ton of effort right now I will get the result faster. THAT’S WRONG.
People have limited willpower. That’s why you need to leverage consistency and habit. During times of low willpower your consistency and habits will be what carry you through!
There’s a theory that every day a person has different times where they either low or high in willpower. For most people the willpower path is strongest in the morning and then it drops right before lunch, picks up again, then falls right before 5 pm.
A really interesting study about judges who were listening to cases for bail saw a dramatic decrease in every judge’s willingness to allow someone to post bail from over 60+% chance of bail in the morning to 0% by 11 am. The pattern was similar right after lunch.
This means that we are more likely to be “out of it” at certain times of the day. But, knowing this, how can we still make sure we effectively achieve our goals?
One strategy that works really well is to set a time you will do your most important tasks every day. That way your body starts to identify that time of day with that task and even if your willpower is low, you will be more likely to push through and complete the task.
If you do your 80/20 task every day, even days when your willpower is low, you can push through and complete the task and effectively achieve your goals.
Chapter 5 Recap: Make 80/20 Work for You
1. You will now 80/20 your life and identify what the most important inputs are that are bringing you the greatest results.
2. You will not stop there! You will continue to test and apply 80/20 strategies until you find the ultimate result that you desire.
3. You will be consistent with your practice. You will not try this every once and a while. You will apply this daily.
I hope you enjoyed this from my previous book 10x Your Life!
If you are interested I am giving out my free work book here! It contains info just like this and exactly how to apply it!