Big Wins the Simple Way: The 80/20 Approach to Saving Money

Here’s something surprising: Just 20% of programmers write 80% of all usable code.

It’s not just programming.

There’s a rule called the Pareto principle which says that 80% of results are generated by 20% of all causes. The Pareto principle is sometimes called the “80/20 rule” or the “law of the vital few.”

It applies everywhere.

Out of all the books that are sold every year, 20% of authors make up 80% of the sales. Chances are you know many of their names (e.g. J.K. Rowling, John Grisham, Danielle Steele, Dan Brown, Stephen King, etc.)

The S&P 500 represents slightly less than 20% of available stocks but accounts for almost 80% of the value of the stock market.

The point is clear, if you want big wins, focus on the vital few instead of the trivial many.

The “Vital Few” of Frugality

To do a Pareto analysis on your spending, just create a list of your annual spending by category and sort it largest to smallest. You can add a column in a spreadsheet that shows you the percent of the total.

I went to the 2019 consumer expenditure survey conducted by the bureau of labor and statistics pulled the data for the average household spending.

Here it is , using their categories:

Personal insurance and pensions11.4%
Utilities, Fuels, and Public Services6.4%
Household furnishing and equipment3.3%
Cash Contributions3.2%
Aparrel and services3.0%
Household Operations2.5%
Housekeeping Supplies1.2%
Personal care products and services1.2%
Tobacco products/somking supplies0.5%

You might notice that these add up to slightly more than 100%. I used the percentages they gave and that’s just how it worked out.

You’ll also notice that spending doesn’t fit exactly into a Pareto. We have 17 categories, which means that the to three to four represent the top 20%. But the top three categories only represent 63% of the total and the top four represent about 74%.

That’s fine. The 80/20 rule is a general principle, not an ironclad law.

We can still clearly see that the biggest categories account for most of our spending. For most people, the most important things to get right are housing, transportation, and food.

Everyone is Different

These numbers are averages and it’s worth running the numbers yourself. This is easy if you use a free service like Personal Capital to keep track of your spending.

You might find that your “big three” are different than most people’s.

I actually have the same big three…but in a different order. My household consists of five people all living off my income and I made sure we got a great deal on our house. So our housing is cheap, but feeding five people is expensive. For us, food is by far our biggest expense.

In fact, I pay $225 extra on my mortgage every month to pay it off faster, and food is still our biggest expense.

Since I don’t know your financial situation, I’m going to assume you’re pretty much average (sorry if that assumption is wildly off).

Related Post: A Guide to Personal Capital: My Favorite Free Tool to Manage Your Money


As the biggest expense for most people, getting your housing right in the key to your ability to stay within budget.

This is too complicated of a topic to fully cover here, but we’ll hit the high level principles and as I write more in-depth articles on the individual topics I’ll come back and link to them from this post.

Shop Around

If you shop around to get a good deal on a new computer, you should be willing to shop around much longer to get your biggest purchase right.

This applies to both buying and renting.

When my wife and I got married I spent several months before the wedding looking for the best deal on an apartment. We ended up in a cute little two bedroom unit with rent that was dirt cheap compared to the more popular apartment complexes.

When we bought a house it was a similar story. The process took nine months, but I got a killer deal. Your real estate agent might get a little impatient and push you to buy something, but stick to your guns and wait for something you know is a good value.

Related Post: How Much House Can I Afford? A Rule of Thumb for Frugal People

House Hacking

Some people buy houses to live in. Some people buy houses to rent out. Why not do both…with the same house?

Obviously this works best with a multi-unit building, but you can apply this thinking to your current home. Do you have a room you can rent out? Can you rent out the whole house temporarily when you’re on vacation?

If you’re single, living with as many roommates as possible is the cheapest way to go. When I got an apartment with my buddies after college, I made sure we found a place that would let us put bunk beds in our two bedroom apartment so we could get more than two people splitting the lease.

Get a Competitive Loan

If you’re going to buy your house, you’ll end up paying a lot of interest. You’ll end up paying less total interest with a lower rate.

One way to do this is to shop around for your mortgage.

Another way is to make sure you have excellent credit. I know I’ve said I don’t care about my credit score, but that’s because I’ve already bought a house. You should care about yours (and even still, I care about it some).

Pay Extra

This sounds like a paradox: Save money by paying extra?

But you can save a lot on interest in the long term by paying extra towards your principal every month. You should run the numbers to see if it is worth it. Interest rates are pretty low and there’s a good chance you can come out ahead by investing instead of paying off your mortgage early.

But paying off your mortgage early kills most of your house payment forever, so it’s also a good choice.


Ditch Your Car

This might sound drastic, and for a lot of people it won’t work. But there are at least two kinds of people who can consider it.

First, if you live in a big city with good public transportation, you can probably get around just fine without a car. It’s probably more inconvenient, but convenience isn’t a great justification for your second-biggest expense.

This can also be an option for two-car families. With a little creativity, you might find a way to get by as a one-car family. This is what I’m currently thinking through for my family.

Drive it Into the Ground

What ends up costing people the most with cars is buying a new car every 3-5 years. The longer you own a car, the less it costs over time.

Yes, repair and maintenance costs increase. But think about it for a second. Let’s say you have a really bad year and need $2,000 of car repairs. That’s still less than how much people usually pay per year in car payments. And that’s in a really bad year. In a good year, you’ll pay less in a year than most people pay in a month for their car payment (and it will mostly be oil changes).

Shop Around

Again, it’s a big purchase. It’s worth taking time to get a good deal.

In I Will Teach You to Be Rich (a good book with a scammy title), Ramit Sethi shares how he bought his car. He waited until the end of the year, when the salesmen were desperate to make quotas and squeeze in some end of the year commissions. He then started emailing several dealerships that all had the same make and model in stock letting them know he would be buying a car within two weeks and asking for their best offer. This started a bidding war, as he would let one dealership know the other was giving him a better deal.

Related Post: Book Review: I Will Teach You to Be Rich


This is annoying. But it does work. If you don’t at least ask to pay less, you’ll pay full price.

If you’re at a dealership, they have all kinds of tactics to make you sweat it out like walking away for a half hour. But ultimately, they want to sell you a car really, really badly and will do it at a discount if you don’t back down.

Buy Late Model Used Vehicles

The idea behind this one is that cars depreciate rapidly at first, but their resale value stabilizes over time.

A one or two year old car is close to being as good as new, but it’s usually priced as if it were much worse. You can use that to your advantage.


Food is tougher because it involves making ongoing decisions. Choosing where to live involves a bunch of decisions up front, and then you can forget about it for months or years. You make choices about how to spend money on food every week. Or in some cases, every day.

That’s why it’s good to think about systems, routines, or rules of thumb you can follow to save money without thinking too much about it.

Eat Out Less

How much does it cost to eat out? Because it’s not that difficult to achieve a per-meal cost of less than $3 per person when you cook at home.

If you can beat that when you eat out, great. Otherwise, cooking is cheaper.

Related Post: The Math Behind Why Cooking is So Much Cheaper Than Eating Out

Prioritize Inexpensive Staples

Rice is dirt cheap. So are beans. Sounds an awful lot like a meal. Plus, neither ingredient is likely to spoil.

You don’t have to go that cheap, but it’s helpful to realize that rice and beans are an outrageously inexpensive source of calories, eggs are a very cost-effective protein, etc.

Related Post: Eating Rice and Beans to Save Money: Frugal or Cheap?

Master Making Five to Ten Frugal Favorites

You need to know how to cook some meals that you actually enjoy that use inexpensive ingredients.

Having go-to meals also gives you the advantage of becoming really efficient at preparing them. My wife makes a dish that uses penne noodles, broccoli, and kielbasa sausage (as well as salt, pepper, butter, and garlic). She’s cooked it so much she says she can make it in her sleep.

Big Wins are Hard Work

Remember our for-fold framework of frugality (aka the frugality quadrant) from the main post on frugality:

The frugality quadrant

If something doesn’t save much money, it better be easy (these are our Quick Wins). If it isn’t easy, it better save a lot of money (these are our Big Wins).

It’s hard work to buy a house. It’s even harder to do your homework, make sure you’re getting a good deal, and get the best possible loan. But there tens or hundreds of thousands of dollars at stake. It’s worth the effort to get it right.

Related Post: Frugality The Simple Way

Related Post: Quick Wins the Simple Way: The Fast Path to Frugality

Latest posts by Matthew (see all)