Over a hundred years ago, a shaggy-haired Italian economist Professor Vilfredo Pareto of Lausanne University was investigating wealth in England. He found a curiously lopsided relationship: a few people had most of the money. Pareto compared wealth in America, Italy, France, Switzerland and other countries and still found the same thing. This strange law of money operated everywhere, every time. Unfortunately, Pareto explained his theory badly. It wasn't until 1950 that Joseph Juran, an American quality expert, renamed the phenomenon the "80/20 principle" --- 20 percent of people had 80 percent of money. Despite the efforts of governments to re-distribute money from rich to poor, Pareto's discovery is still true today. The wealthiest 20 percent of Americans own 84 percent of money. These numbers are shocking. Money and the 80/20 principle are more powerful than governments.
Money is a force, like the weather. Once we understand this how money works, and take one simple action, our money worries can disappear. Money dislikes being equally distributed. Money clones money. Why is that and how can we attract it to us? Albert Einstein called compound interest "the most powerful force in the universe." Money obeys the 80/20 principle because of compound interest. Start with a small dollop of money, save and invest it, then compound interest will do the rest.
In 1946, Anne Scheiber, who knew next to nothing about money, put $5,000 into the stock market. By 1995, her modest nest egg had ballooned into $22,000,000. Up 440,000 percent, all because of compound interest! If we never save money and invest it in something that compounds our money, we will always be poor, no matter how much we earn. If most people have little money, it's not because they don't earn it. It's because they don't save it. The typical 50-year-old American has received a substantial income, but has savings of just $2,300. People with the most money have usually saved and invested it for many years. Compound interest multiplies savings in a breathtaking way. Someone who is 23, saves $200 a month out of her income and invests it so that it grows at 10 percent a year until she is 65, will retire with $1.4 million.
The secret is to save ten percent of your income, starting right now. Experience has shown that the only reliable way to save this much is to save automatically. The savings have to go straight into a special savings account on pay day, before you see the money. You can't spend it cause it's already gone. Once you get into this habit, saving is easy, otherwise, it's next to impossible.
It's important to have a reason for saving, connected with your lifestyle and happiness. Surveys around the world and across cultures have shown that money can buy happiness, but only if you're poor. Beyond a certain money level, more money doesn't make much difference to happiness. This is why it's important to realize that there is trade-off between our life force energy and our money. In working hard to earn money usually staying in a job we wouldn't stay in if we were rich, we sell ourselves short on time and our life energy. Often, the effort to make a living consumes our life and we are often made miserable by it. We underestimate how much life energy is being consumed by our work. We overestimate what we're getting in return. That's misguided perception. The trick is to get more life energy for less effort:
Through saving and accumulating money, we avoid trading our life energy for money. With enough investment income, we can stop depleting our life energy through unfulfilling work. We choose our work and hours. By doing what's important to us and what we enjoy, we are engaged and energized, so we multiply our life energy.
We might decide to use our money to subsidize our ideal life and work style. Instead of letting the lack of money rule our lives, making work stressful or miserable, we can use money to regain control of life. We can use our time and money intelligently. Make less money more money by simply perceiving it in a different manner.
This is the "80/20" way. We save, invest and multiply money. We enjoy our work. Investing money feeds our independence. With money, our servant and not our master, we spend life energy on the few people and things we love.
Richard Koch is the author of the recently published "Living the 80/20 Way." His earlier book, "The 80/20 Principle," was a world-wide bestseller and one of GQ magazine's 50 best business books of all time.