🧠 Mental Models for Money #1: The Pareto Principle

I want to start a recurring segment in this newsletter called Mental Models for Money.

These aren’t tactics or rules to follow. They’re ways of thinking that help you decide where to focus, without needing to be an expert or extra disciplined.

For this issue, let’s talk about the Pareto Principle, often summarized as the 80/20 rule.

In today’s edition, we’ll go over:

• What the Pareto Principle (80/20 rule) means in personal finance

• How to identify the small decisions that drive most of your financial outcomes

• How to apply this way of thinking to spending, income, and investing

TLDR;

The Bottom Line

Most financial outcomes come from a small number of decisions. The Pareto Principle helps you focus on the expenses, habits, and investments that drive most of your results.

The content

The Pareto Principle Explained

The Pareto Principle suggests that around 80% of outcomes tend to come from 20% of causes. The exact numbers don’t matter. What matters is the idea behind it: most systems are uneven.

A small number of inputs usually account for most results, while the rest have diminishing impact.

In business and finance, this principle is used to identify which activities actually produce value, so effort can be concentrated there instead of spread thinly. That’s where it becomes relevant to your personal finances.

What This Means For Your Personal Finances

Most people treat their finances as if every decision matters equally. They try to optimize every purchase, every habit, every peso.

But if you look closely, financial outcomes are rarely that evenly distributed.

• A small number of expenses usually explain most of your spending.

• A small number of habits explain most of your saving behavior.

• A small number of decisions explain where you ended up financially this year.

What this mental model is useful for

It’s useful when:

• reviewing your spending

• deciding which habits to build

• deciding what to stop worrying about

Actionable Tips For You

Using the Pareto Principle in practice

The Pareto Principle helps you identify leverage.

Applied to money, it helps you separate what is structurally important from what isn’t.

For example, if one expense category dominates your spending — say, frequent gadget upgrades — that’s where your attention belongs. Trying not to spend ₱150 on iced coffee doesn’t matter much if you’re buying a ₱90,000 iPhone.

The same logic applies to income. If most of your income comes from a main job, it’s usually worth protecting and strengthening that, instead of getting distracted by small side gigs.

If you’re juggling a ₱40,000-a-month main job and a Facebook buy-and-sell side gig that brings in ₱15,000 but takes a lot of time and energy, it’s worth asking whether the side gig actually deserves the attention it’s getting.

The goal isn’t to do more but to do what’s impactful. 

How this applies to investing (and to life)

The same unevenness shows up clearly in investing.

For most Filipino investors, the bulk of their results come from boring, consistent holdings like bank savings, Pag-IBIG MP2, or conservative UITFs and index funds. These don’t get much attention, but they quietly do most of the work over time.

Meanwhile, a much smaller portion of the portfolio like  individual stocks, crypto, or speculative bets often gets more mental energy than it deserves.

The mistake is treating all parts of the portfolio as equally important. In reality, consistently adding to MP2 or an index fund matters more than switching investments or reacting to market noise.

It’s about knowing where outcomes are coming from.

This way of thinking applies to effort as well. Your main job might provide stable income, predictable cash flow, and benefits like HMO or bonuses. A side gig might demand more time and add stress without materially changing your finances.

When you apply the Pareto Principle, you may realize that some things consume a lot of energy while contributing very little to your overall progress.

Final Thoughts: A way to reflect on this

You don’t need to identify your exact 20%. Just notice where most of the weight is.

Which expenses, habits, or decisions explain most of how your money feels right now? Which ones turned out to matter far less than you expected?

That awareness alone often leads to better decisions without adding more tools or effort.