"The best is the enemy of the good."
"If the world were perfect, it wouldn't be."
The printer is out of ink. Ugh! Now I have to replace it. I wonder how many people knew it was out of ink but let it sit, waiting for me. I pop in the replacement and my article prints. I'm fascinated by an article written by Tim Ferriss, called The Top 5 Reasons to Be a Jack of All Trades. I've often thought that I was pretty good at quite a few things, but the best at nothing. The gossip seems to be that everyone should specialize, though. That's where the money is, they say. Pick something and be the best at it. Not only does that go against my natural curiosity, but it doesn't sit right, but I don't know why.
The article is a bit of confirmation bias, because like everyone else, I want to be able to say, "that's exactly what I've been thinking...only articulated better!" In the article, Tim talks about how the phrase "jack of all trades, master of none" is nonsense. He talks about how people who know a little bit about a lot of things see relationships and the big picture better. Finally, he talks about his wide use of the 80/20 rule.
It gets me wondering about how the 80/20 rule could apply in personal finance.
The 80/20 rule (actually called the Pareto principle) is the idea that 80% of outcomes come from 20% of the inputs. Some examples are that 80% of most companies' productivity comes from 20% of their employees, 80% of a language comes from 20% of the words, and 80% of activities like sports or dancing come from 20% of the moves. In short, 80% of the mastery comes from 20% of the effort.
This is a good deal and gives you the biggest bang for your buck.
The final 20% takes more time, money, and energy. This is what economists call diminishing returns (or if you are a nerd, the law of diminishing marginal utility). This is the part of the curve where professional athletes live. They were 80% up the curve by the time they were eight. They make their money by climbing the rest of the way.
This does not give you the bang for the buck you got on the 80% part of the curve. The good news is that, unless you have a specific reason - like professional athletes - there is no need to put in the effort to get there. You are free to spend your precious time and energy on getting 80% of the way up your next endeavor.
80/20 in Personal Finance: Rules of Thumb
In personal finance, we use the 80/20 rule to create rules of thumb. Rules of thumb are rules that are meant to be general advice that's easy to remember and will get people most of the way to where they need to go.
As we think about rules of thumb for people, it's helpful to think about ye olde bell curve. People (however you organize them) will generally resemble a bell. Most people are in the middle; they are average. On the ends are the exceptions; people who have something unique about them.
Since there are more average people than non-average people, by definition, there are more of them. That's what the middle of the bell curve represents.
The bell curve could represent people's financial circumstances, where a particular rule works for average people but not for people who have overly complex situations. Alternatively, the rule of thumb might not be a good idea for someone who doesn't have any complexity in their situation and doesn't need any advice or rule.