Pareto's Principle - The 80-20 Rule - Vital Few and Trivial Many

Pareto's Principle - The 80-20 Rule - Vital Few and Trivial Many

29/01/2013 by Padmanaban Balasubramanian

 

This principle holds good for everywhere. 80% of the populations are working for 20% of the people, and 20% rich are holding 80% of the globalwealth. This Pareto's Principle perfectly fits our day to day life also, which many of us have not thought about this before.

Assume, the individual is earning 50K per month and he spends 80% which is 40K towards all the expenses and he hardly saves 20% of the money which is 10K per month. Let's take the individual, goes to job at the age of 21 onward and got married around 25. If he plans, to retire at the age of 55, which means he is going to work for the next 30 years. For every increase of salary, there is a proportionate of increase in spending or more. For calculation purpose we will assume salary and savings are constant for the next 30 years.

The amount one will earn in the next 30 years will be 1.8 Crore (50,000*12*30) of which 1.44 Crore will be spent to maintain the same standard of living. The savings part is 36 Lakhs only.

After 55 (most of us are working for private, we are not entitled for any retirement benefits), either there will be no income or lesser income. Whereas the 20% of 50K which is 10K per month in a period of 30 years at the rate of 15% CAGR will fetch you 7 Crores, in case of 12% CAGR it will fetch Rs. 3.52 Crore, which they will not even earn during their tenure of 30 years. Look at the power of compounding to double the returns, and it requires only 3% more not 24% CAGR. SENSEX has given 17% since inception, and the entire top rated funds has given more than 20% CAGR yet, I always tell that you will get 15% CAGR in the long term to manage your expectation.

Where the problem lie here is, most of not even saving 10% regularly, in the above example if they save 10% then still they can generate 3.5 Crore at the rate of 15% CAGR, and the same money what they have earned during the tenure of 30 years at the rate of 12% CAGR.

This helps to understand where we stand and how to change our spending habits to create something for our rainy days.

Creating wealth is a child's play and it requires only one thing which is called discipline.

When you need something first you have to give, unfortunately people will not invest anything but expect returns.

I remember this saying "Everybody wants to go to HEAVEN, but nobody wants to DIE".