The Pareto Principle, also known as the 80/20 rule, states that roughly 80% of effects come from 20% of the causes. You may have heard this term used in the business world to some effect that 20% of the people do 80% of the work, or 20% of sales come from 80% of the customers, etc. The actual numbers may turn out to be a little less or a little more, but you get the picture. Well, I want to show you how to apply that same principle to your finances. We want 20% of our income to do 80% of the work for us as we head towards financial freedom. The formula that I use is as follows: 10% tithe + 5% 401(k) + 5% savings = 20% (the remaining 80% is used for day-to-day operating expenses)
(To calculate your percentage, simply add the total dollars that you've contributed to each of those categories over the last month, divide it by your gross monthly income, and multiply that number by 100).
If you remember the S.I.N.G method, the above breakdown actually takes care of 75% of the process, which is pretty close to 80%! My tithe qualifies as Giving, the 401(k) contribution qualifies as Investing, and the direct savings takes care of...you guessed it, the Savings. The strategy here is to have money accumulating for you as you continue to pay down your debts. That way you'll already have a head start when you're able to really focus on increasing your net worth.
Now, I have heard other sources say that you should stop contributing to your 401(k) or stop giving/tithing until you're out of debt, but that's not the route that I've chosen (mind you, I've had a positive net worth for over a year now in spite of a mortgage and paying down school loans). However, you may find that my method isn't right for you at this time, and that's OK. I'm just sharing the practices that have helped me thus far.
No matter which road you decide to take, just pick one and get moving. The point is, you have to start somewhere. The sooner you start, the quicker you'll reach your goals. Once you reach the first goal, keep the momentum going until you get to the next one, and the next one, and so on. You can do it! Your financial freedom awaits!
Change requires action!