The 3 Expenses that Matter Most

Back in 1906, an Italian economist named Vilfredo Pareto noticed that just 20% of the population of Italy owned 80% of the land.

That makes sense.  Few people are rich, and they're the ones who own most of the stuff.  So, Romanian-American management consultant Joseph Juran developed the concept further, by observing that 80% of results come from 20% of causes.  For example:

• In 1988, the New York Times reported that about 80% of video rental revenues came from just 20% of the stock.
• Microsoft has noted that 80% of crashes can be prevented by fixing 20% of the most-reported errors.
• 20% of the best professional baseball players account for 80% of total wins.
• Studies show that approximately 80% of healthcare expenses accrue to 20% of patients.
• The frequency of words used in most languages, the size of cities, the magnitude of earthquakes, and even the intensity of solar flares all follow similar distributions.

If the Pareto Principle, or the 80/20 rule, shows up in so many surprising ways, it might matter for our personal finances too.

Looking at the average budget

Every year, the U.S. Bureau of Labor Statistics conducts a comprehensive study on average consumer spending.  In the most recent data available (2023), the biggest costs per household were food (13%), transportation (17%), and housing (33%).  That adds up to 63%.  With the addition of Social Security taxes (not optional, last I heard!), the total goes up to 75%.  That's right – healthcare, entertainment, clothing, personal care products and services, education, tobacco/alcohol, donations, savings, and "miscellaneous" account for the remaining 25% of most people's spending.  It's not quite a perfect 80/20 ratio, but it's pretty close.

So how can this help us save more, give more, or maybe even work less?

1.  Housing

At a whopping 33% of the average annual budget, housing is the heavyweight in the spending category.  Now, you might argue that home prices have surged in the past few years, and things like taxes, insurance, and maintenance costs are out of your control.

But how do you explain the fact that the average home size has increased from 983 square feet in 1950 to almost 2,200 square feet in 2023 (down from over 2,300 square feet a couple of years earlier)?  And this is true even as the average number of family members continues to shrink.

Not only that, but most of the space in these homes sits unused.  Studies show that the vast majority of our time is spent in the kitchen and living room (or the family room, if a home has two living spaces).  And we do spend several hours per day sleeping, usually in our bedrooms.  But many of us use all of those extra rooms for the occasional guest, for display, or for storage.  Even in my 800 square foot apartment, we spend little time in the second bedroom.

We often talk about having "more space for entertaining," but how often do most of us entertain?  Once or twice a year?  Meanwhile, we're paying for all of that extra space every day.

Consider how much space you really need, and whether a huge house and yard, with huge maintenance, insurance, tax, and mortgage costs is really necessary or worth it.

2.  Transportation

The amount of money people in the U.S. put in savings each year has hovered between 3% and 5% of income since the 1990s (it's currently just over 4%).  It's a pretty sad state of affairs when we spend more than four times as much on our vehicles (at 17%) than we do on savings.

Why is that exactly?  Of course, gas prices are high, but today's cars get better mileage than ever.  However, we keep moving further from work, mostly so we can afford larger homes.  The two biggest chunks of our budgets often work together like that.

The truth is, vehicle spending is by far one of the easiest categories to control.  With modern vehicles easily lasting 100,000 miles, and some reliable brands often hitting 250,000 miles with basic maintenance, saving money on your cars has become easier than ever.

It's as simple as remembering to love your old car.  Each month you continue to drive Old Faithful, you can essentially write yourself a check for hundreds of dollars.  And when replacement becomes absolutely necessary, you can use those savings to buy a vehicle that's a couple of years old – one with lots of life remaining that costs thousands less.

Why not consider owning just one vehicle?  My husband and I have done this for almost our entire married life, and we've always made it work by coordinating our schedules, sharing rides, and using a bicycle.  It's made us thoughtful about how we use transportation, and thoughtful about each other's needs.  Saving an entire car payment, plus insurance, gas, and maintenance has made a huge difference to our budget.

At the very least, you could go car-lite, and reduce the miles you travel.

• Share a ride.  Go with a friend to church or another place you both regularly visit.  Investigate carpooling to work.
• Work from home.  Even one day a week will save 20% of your commuter miles.
• Combine errands so you can take care of them in one trip instead of several small ones.
• When possible, walk or ride a bicycle instead of taking the car.  This lets you save money on gym membership too.
• Reduce after-school activities so you don't spend every afternoon in the car.
• Think twice before driving to the next town over just to go to a particular restaurant or see a movie.

3.  Food

Yes, we all have to eat.  But did you know that we spend the majority of our food dollars away from home, and that number has been climbing in the past several years?  Three or four restaurant meals every week gets expensive.

And when we do buy food to prepare at home, we spend more for convenience than for anything else.  I do this too.  I like to buy those bagged salads, with everything already cut up and mixed, rather than purchasing each salad ingredient separately.  I buy pre-shredded cheese.  I buy rotisserie chickens.  I buy canned organic soups rather than cooking from scratch.*

* Thank you for supporting this blog, which has no ads.  If you buy through my links, I may earn a small commission.

Contrary to popular belief, healthy eating is not the most expensive way to go.  Fruits and veggies in season, whole grains, legumes, and eggs cost pennies per serving, and even meat and dairy are reasonable if we don't make them the center of a meal.  However, chips, cookies, and junk food can be quite pricey.

It's easy to save money on food by eating at home and keeping meals out for special occasions and when traveling.  Consider going meatless at least one day per week.  Plan your meals and your grocery lists, and worry less about variety and more about ease so you're less tempted to reach for junk food or take-out menus.

Related article:  6 Strategies to Simplify Your Life Every Day

Use the Pareto Principle to save serious cash.

Vilfredo Pareto and Joseph Juran showed us that by focusing on a few important factors, we can make big changes.  So if you want to save more for retirement, education, travel, or philanthropy, focusing on the Big Three expenses can put you over the top.

We saved and gave 28% of our income last year, and there's no doubt that most of it came from a small number of budget items.  Our small home, paid-for car, and thoughtful food spending made the most difference.  We still bought theater tickets and a new laptop.

If you want to do the same, you might not have to make do with your old sagging jeans, token gifts, or no weekend outings.  Go to that Oscar-bait movie you've been waiting for, and splash out for the Lego Cozy House building set your granddaughter will love.

Don't stress so much about the pennies.  Focus on the big-ticket expenses, and you can save a fortune.

Related article:  18 Places to Use the 80/20 Rule to Help with Decluttering

Imagine feeling financially secure without sacrificing what means most to you.  That kind of prosperity is available when you live simply, save smartly, and budget with a purpose.  That's what my new book, The Wealthy Minimalist is all about.  Packed with tips, insights, and relatable examples, it's your guidebook to a more secure, sustainable, and satisfying future.

Be sure to pre-order the e-book edition now (at a special price), and look for the paperback and hardcover editions on their publication date, September 1.