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Why Understanding Pareto’s Principle Is So Critical to Your Finances!

Understanding this one simple concept can launch on an expedited path to financial independence.

Here we go math nerds! This concept, the Pareto Principle.

This concept is very straight forward, and applies to all aspects of your life. Since this is a great community of financial independence seekers, let’s apply this to finances.

Pareto’s Principle states a rule known as the 80/20 rule. This rule states roughly 80 percent of your effort creates 20 percent of the results. This then means 20 percent of your effort accounts for 80 percent of your results.

Now let’s try to apply that to finances. In a financial context, this means 80 percent of your spending applies to 20 percent of the things you spend on. When you take a step back and begin to analyze your expenses, notice where the majority of your spend comes from. The three largest expenses, for most individuals, are your housing, transportation and food.

Now there are other individuals who have gone even further to investigate this. When you breakout the typical 20 percent of your expenses, you find a chart like what is shown. This then goes to say that your single most important expense is housing!

Optimize your housing expense and you can crush it. I have done so through house hacking. This has been a great way to live for free and cut my single largest expense every month.

This principle can applies to all parts of the world we live in. It is interesting when you sit back and audit your lifestyle to better understand what your 80/20 is!

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