The Other 80/20 Rule You Can Apply to Your Business and Personal Life

2016-12-14-1481723677-399672-AndrewAbernathey.pngBy Andrew Abernathey

Creating specific financial goals and growing your personal balance sheet continues to be a challenge for most people. Everyone has thought about how to improve their spending strategy, but the average person still has a habit of purchasing beyond their means. The challenge for entrepreneurs is to not fall into these traps so they can put their personal money to good use in their own business.

One guideline that has worked well for me is the 80/20 rule. The most popular 80/20 rule states that "80 percent of outcomes can be attributed to 20 percent of all causes for a given event." You could put that rule to use in the business world, your relationships, etc. But what if there was another 80/20 rule that could help you along your personal and business journey to success?

Another 80/20 Rule

During my life thus far, I have looked up to individuals who have done very well in the investment world. I have always had the same question in mind: How did they get there? How did they build their brand? What about this person caught others' attention? Was it the money they spent to make themselves look wealthy, or was it their humility along the way? Did they invest/save every dime they made to work towards their personal wealth goals? There are most likely many different answers to this question, as there are many different ways to cross the "success finish line."

When I hear about the "80/20 rule" now, the first thing that comes to mind is that 80 percent of my assets in dividend income serve as investments, and the other 20 percent in assets do not generate any income. If you follow this rule religiously, you will be surprised by the extra cash you can free up to invest back into your own business. Here are two examples of how it works:
  • Individual No. 1 has a $600,000 home (it does not matter if they have a mortgage), a $60,000 car, a $40,000 boat and $150,000 invested in their own business. That would put them at total assets of $850,000, of which $700,000 has no dividend income. The ratio comes to 17.7/82.3, which does not work with this 80/20 rule.
  • Individual No. 2 has a $150,000 home (again it does not matter if they have a mortgage), a $10,000 car, no boat, and $690,000 invested in their own business. That would also put them at total assets of $850,000, of which only $160,000 has no dividend income. This individual's ratio would be 81.2/18.8, which does adhere to this rule.
At the end of the day, will this rule help you keep your personal balance sheet in check and grow your business, or is it just something else to keep track of? I think the answer will vary from person to person, but I can say that it has not only served me well in my world of personal finance, but it has helped me invest much more capital into my own business.

Are you struggling to invest capital back into your business? Do you look around and see way too much wasted capital? Try using this iteration of the 80/20 rule and get your money working for you -- instead of the other way around.

Andrew Abernathey is the managing member/founder at Ritaway, a value-oriented investment partnership.