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Why Doesn’t The Government Understand The 80-20 Rule?

I spent many years of my life running and leading sales organizations. One of the principles I learned along the way is sometimes referred to as Pareto’s principle.  This principle is also known as the 80-20 rule, the law of the vital few, and the principle of factor scarcity.  It states, for many events, that 80% of the effects come from 20% of the causes. (source: Wikipedia). Italian economist Vilfredo Pareto observed in 1906 that 80% of the land in Italy was owned by 20% of the population, and developed the principle by studying that 20% of the pea pods in his garden contained 80% of the peas. In modern theory, many businesses will often share with their sales force that 80% of the sales come from 20% of the clients.

In the past year, we have heard all sorts of ideas from politicians about how to fix the recession, restore jobs, and get the economy moving again in the right direction. While we have listened to different ideas from both political parties and have witnessed some extremely high dollar policies implemented already, we continue to be mired in a state of economic stagnation.

Everyone is looking for some common sense ideas which is why our leaders need to get focused back on the 80-20 rule. According the Wall Street Journal (9/17/2010), the top 20% of household in the United States currently account for 50.3% of all pre-tax income in America. The bottom 40% only account for 12%.  The top 1% of wage earners made over $900,000 per year, and the top .1% made over $17,000,000 per year.

With the recent passing of the health care bill and tax cuts set to expire at the end of 2010, we are doing exactly the opposite of what a smart business would do to their clients.  We are taking the best clients in our country, and quickly implementing policies and procedures to make them not want to do more business in the United States.

While there is no quick and easy answer, we do know this. We want the people who make the money and have the money, to spend more of it from a consumption level or be incented to invest it to grow their business. Both of those basic common sense thoughts create more jobs by getting those income earners in the top 20% excited about doing more business and deploying their capital back into the economy.

Successful businesses that run well truly understand Pareto’s principle. They spend most of their time with the 20% of employees who can generate 80% of results, and invest the time with the 20% of the clients who do 80% of the business. You would have thought we would have figured that out by now.  It may be time to take a walk through our pea pod garden!

oXYGen Financial, Inc. co-CEO Ted Jenkin  is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

Hey!

My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

My mother is still the only one that calls me by my real name Theodore Michael, my wife calls me Teddy, but for the rest of you it is just plain old Ted.

Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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2 Comments

  • Avatar
    September 25, 2010

    This is such an important point! Sadly, we often forget the 80/20 rule. You can apply it to everything. For example: some marriages fail is b/c people focus on the 20% that is bad instead of the 80% that is good in their partner.

    Thank you for such an important reminder that we can use in all aspects of our lives especially our financial lives.

  • Avatar
    Sam
    December 1, 2015

    June 10, 2013 When you mention in the cotmenms here 20% off the top that you never touch and live off the rest are you suggesting that 20% be allocated to Retirement accounts only? What about goal savings? Are you suggesting funding goals outside the 20%?

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