Want to make the biggest changes to your budget to see the most dramatic results? Use the 80/20 rule, also known as the Pareto principle. That rule says that 80 percent of the effects are driven by 20 percent of the causes. For your money, that means that 20 percent of the money you spend (items you buy, bills you pay) eats up 80 percent of your budget. Instead of examining your budget line by line and wondering where you’re going wrong, start by focusing on the areas where your spending has the biggest overall impact. This may feel obvious in some areas, like housing or food. But if you can break down some of the costs within those key categories, you may spy a few spending decisions that have thrown the balance into a tizzy.
Say you go to the drugstore and buy two nail polish colors, a bottle of shampoo, and a bottle of conditioner. But on your way to the checkout counter, you think about that weird noise your hair dryer made the last time you used it. You pick up the cheapest one they’ve got, but it’s still way more expensive than anything else in your basket. If you analyze that receipt, you’d probably find that 80 percent of the total was due to the hair dryer.
Check your own spending by seeking out the most expensive items on your receipts and the most expensive portions of your monthly bills. Can you cut back on those highest costs to create a more noticeable reduction in spending?