Quick Wins, Pareto, and Personal Finance
By Pinyo • Dec 7th, 2007 • Category: Financial PlanningIn “Using Pareto Principle to Improve Personal Finance” post, I demonstrated how we could use the Pareto principal to focus our limited resources on the things that will give us the most benefits. Raymond from Money Blue Book commented:
“Interesting concept — so is it suggesting that I would be better of not trying to save money giving up drinking Caribou Coffee and bottled water and instead focus on big ticket items like rent and car payments?”
That was a great question! In this post, I want to share another quality improvement concept called Quick Wins (also known as Quick Hits). Pareto is a great way to prioritize factors based on their impact (i.e., potential benefits), but it fails to consider the effort (e.g., time, money, people, technology, etc.) needed to fix or improve the problem.
Quick Wins allow us to pick out the low hanging fruits and do the easy stuff regardless of their benefits level.
The chart above is a Benefit-Effort Matrix. Let’s assume each blue dot is an idea to save money. It’s not too difficult to think about how much effort — i.e., high (H), medium (M), or low (L) — to implement an idea. For example, stop drinking Caribou Coffee would be medium or low effort especially when compared to finding an apartment with lower rent, or changing your car to lower the monthly payments. On the vertical axis is the level of benefits. For example, money saved from not drinking Caribou Coffee would be low compared the other options.
Let’s go through some examples:
- Transportation expenses:
- Replacing your gas guzzling, pollution spewing old junker with a brand new hybrid (medium financial benefit/high effort). Note: if you consider the environment, this might be high benefit.
- Driving less, performing routine maintenance, using more public transportation, etc. (low-medium benefit/low effort)
- Electricity expenses:
- Update all major appliances to high-efficiency Energy Star products (high benefit/high effort)
- Turn off lights when not in use, use CFL light bulbs, unplug chargers and some appliances (low-medium benefit/low effort)
- Car insurance expenses:
- Trade your Mercedes S500 for a Toyota Camry (medium benefit/high effort)
- Call different insurance companies to get a better rate and increase the deductible (medium benefit/high effort)
Note that the rating is all relative and unique to the individual. It’s possible for me to say that an idea is low benefit/high effort, while you say that it’s medium benefit/low effort. Lastly, the red shaded area on the matrix means the idea requires a lot of effort, but yield very little benefit — these should be avoided.
This post was featured in:
- The Carnival of Personal Finance #131 hosted by Get Rich Slowly. For more information please visit the Carnival of Personal Finance.
That’s a great way to think about it and once again you have produced a wonderful graph to illustrate the point.
Personally, I’ve been focusing my time and energy on the low-benefit/low-effort quick wins. I find that coming from a situation of total financial disaster I have a large number of quick wins available and they quickly add up. I am seeing fast progress and that keeps me engaged in getting my finances in order.
Once I reach a point of stability I will begin to tackle the larger-effort wins.
Good advice Moo-ster,
I think an effortless way to cut costs is to simply be efficient in home utility costs. No need to blast the heater when you can simply put on a sweater and a pair of socks.
Also I recommend checking all window latches to make sure they are all fastened. One winter a while ago I was wondering why my home was so drafty all winter until I discovered the top pane on one of my windows had been left slightly ajar all winter…duhh
-Raymond
I think that’s why Dave Ramsey sets his snowball up the way he does. He wants to get you hooked on the quick, easier wins so you’ll be willing to go the distance.
Wow! I can’t tell you what an eye-opener this post and diagram were! It explained something that had been niggling at my mind for a long time. My husband is all about the “big things.” But he’s prefectly suited to sit and figure out big things through to their conclusion. My personality couldn’t be more different. Now I see that he’s an ideal “Pareto” man while I’m a “Quick Win” woman. We’re perfectly suited for optimal efficiency. I’m going to show him your charts and concepts — I wouldn’t mind a little credit for the value of the skill set I bring to our union
@FinanceAndFat - Thank you for your compliment on the graph. Quick wins are great, especially when you are working with limited resources. Best of luck on your journey.
@Raymond - Thanks! I wish my mom will listen to me about the heat. I am practically sleeping naked even when it’s freezing outside. I am going to go check my windows now though, but I think they are drafty even when tightly shut.
@Mrs. Micah - Yeah, good point. I prefer maximizing money and pay off high interest first. But both methods work.
@Mrs. Quick Wins - Please say high to Mr. Pareto for me. I am glad you liked the diagram.