The Pareto principle (sometimes called the 80/20 rule) is a theory that states 80% of your results will come from 20% of your efforts. This theory holds true for most things, especially your finances.
I joke that I’m a fan of shortcuts, which is why I love applying the 80/20 rule to my finances whenever the opportunity arises. Below are three small short-term actions that can yield major long-term results when it comes to your money.
Negotiate your salary
Negotiating your pay is one of the most important steps you can take in your career. While virtually anytime is a great time to ask for more pay, the best time to ask for more is when you get your very first full-time job.
For example, assume you’re offered a job paying $40,000 annually when you’re 25 and you receive a salary increase of 2% every year. After five years, you’ll be earning about $43,297.
However, if you negotiated your salary and were able to get $45,000, you’d earn an extra $5,000 that year. With the same 2% annual salary increases, your salary would rise to $48,709.
If you don’t think that’s a significant difference, look at it this way: In those first five years of work, the non-negotiator would have grossed a total of $208,162. But the negotiator would have raked in $234,182, an extra $26,020. It only takes a 30-minute conversation to talk about your salary and the results can pay off for the rest of your career.
What’s the easiest way to grow your net worth? Force yourself to save automatically. Setting up automatic contributions to a high-interest savings account, RRSP, or TFSA is all it takes. It’s easy to promise yourself to start saving the next time you get paid. However, when your payday arrives, there are probably things you want to buy. Socking away money before you have the chance to spend it will prevent you from buying things you don’t need.
Want to ramp up your efforts? Any time you get a raise, automatically save the extra amount. By committing to an automatic savings plan, you stop yourself from getting in your own way and let your savings grow.
Put 20% down on your home
It’s not an accident the suggested down payment on a home is 20%. When you put this much down on your first home, you avoid having to pay mortgage default insurance. Furthermore, a large down payment reduces the overall amount of money you need to borrow and you’ll save thousands of dollars in interest.
For example, let’s assume you’re going to buy a $400,000 home. You get a five-year fixed-rate mortgage with an interest rate of 2.5% (if you shop around for the best mortgage rate, you might get a lower rate) and a 25-year amortization. If you put 15% down (or $60,000), you’ll pay $6,120 in mortgage insurance and $39,859 in interest over the first five years.
But if you put 20% down ($80,000), you have to pay $36,851 in interest over five years. By putting an extra 5% down, you’ll pay less in interest and not have to pay mortgage insurance. In total, you’ll save $9,128 over five years.
The bottom line
Negotiating higher pay, automating your savings, and maximizing your down payment are single actions you can take that will pay off for years. These steps will give you more money to save and invest in the decades that follow.
- Life Events That Made me Think About Money
- 5 Reasons to Save Money
- The Benefits of Automatic Savings Plans
Flickr: Alex Vakulenko