The 80 Percent Approach to Personal Financial Planning

Personal Financial Planning Success

What Does a Dead Italian Guy Have to Do with My Personal Finances?

I’m a big fan of the Pareto Principle.  It is named after Italian economist Vilfredo Pareto and is also known as the “80/20 rule.”

When observing commerce during the late 19th and early 20th century, Pareto noticed that 80% of an economy’s outputs often resulted from only 20% of the inputs.  In other words, many businesses achieve 80% of their profits from 20% of their products and achieve 80% of their productivity from 20% of their employees.

I’m also a big fan of business coach Dan Sullivan.  He appears also to be a proponent of the 80/20 rule.  In his audio book, The 80 Percent Approach, Mr. Sullivan talks about how to apply it in your personal life to improve your business and personal effectiveness

I took away two major points that apply to improving your personal finances:

#1 – Perfectionism is the Biggest Enemy of Progress

How many times have you made a commitment to yourself with every intention of following through?  However, when you start digging into what it actually takes to make something happen, you quickly get bogged down in the details, lose momentum, get frustrated and give up.  This in large part explains why 80% of New Year’s Resolutions fail.

When I have failed to follow through with a commitment in the past, it’s often because I’m approaching it with the mindset of a perfectionist, thinking things like, “No job is worth doing if you can’t do it right,” or “This is all of the things the experts say should be done, so I should do all of these things too.”

The problem with the perfectionist mindset is you then end up “shoulding” yourself to death, make very little headway despite tremendous effort and ultimately give up without having made meaningful progress.

#2 – Commit to Getting 80% Done as Quickly as Possible

Instead of committing to how you “should” get your finances in order, commit to getting 80% of the job done as quickly as possible.  You’ll reap 80% of the benefits within your personal finances with only 20% of the effort.  You’ll feel a great sense of accomplishment and may even establish momentum to tackle some of the remaining 20% of your long term financial plan.

The 80 Percent Approach Checklist to Personal Financial Planning

Here are the three actions that will make the biggest difference in the shortest amount of time to get your finances in order:

#1 – Establish a Six Month Emergency Fund

Within the next 30 days, calculate what your monthly living expenses are.  Looking at 3 months of bills and credit card statements should give you a pretty good idea.  Multiply this by six and set this as a goal to always have as cash on hand in a separate bank account.

Set a goal for how much you’ll deposit in that account every month (even as little as $5 or $10) until you reach your six month target.

#2 – Buy Adequate Life Insurance

Within the next 30 days, make a commitment to get at least one if not several quotes for life insurance.  It’s easy to get lost in the details of how much insurance to buy and what kind of insurance to get.

To get the ball rolling, get quotes on a term life insurance policy that will be in effect for at least as long as your kids are around (for example, 15 years if your kids are 3 years old) and covers enough to pay off your mortgage, put your kids through college and replace at least 1-3 times your current household income.

So, for example, if you have a $200,000 mortgage balance, one 3 year old child that will cost $200,000 for a college degree, and a household income of $100,000, go get quotes for a 15 year term policy for at least $500,000.

#3 – Save at Least 10% of Your Income

Once you’ve got your Emergency Fund filled up, begin investing for your retirement.  Set a goal of saving at least 10% of your income.

If this is too intimidating to start with, set a goal of saving at least enough to take advantage of any company matching contributions that you have access to with an employer-sponsored 401(k) or other retirement plan.

If that’s still too intimidating, set an initial goal of saving 2% or 3% of your income and an additional commitment to raise this amount by 1% every year until you get to 10%.

Living within your means in this manner is a critical step within your long term financial plan and failure to do so can result in having to make some hard choices as you approach retirement.

Your Assignment – Stay Focused

Of course, there are many other things to consider when it comes to your long-term personal finances (investing in a well-diversified portfolio, a more detailed life insurance assessment, disability insurance, making a will, establishing a health care directive, managing your tax bill, etc.)  However, it’s far more important to stay focused on the three tasks listed above, and to get them in motion and completed as quickly as possible.

Staying focused on a smaller list will give you the sense of accomplishment you need to make the long-term commitment required to get your finances in order and insure the financial well-being for yourself and all of your loved ones.