Most people would love to have one or more forms of passive income to rely on, but far too many individuals assume that it takes too much effort to come up with a workable idea for one. What they don’t realize is that they could simplify many of their current sources of income, thus allowing them to continue to reap the financial rewards without putting in much work. All one needs to do is perform what’s known as an 80/20 analysis.
This technique stems from a concept called the Pareto Principle, which states that in any given endeavor, whether it’s a new business, a fitness regimen, or even a personal relationship, 80% of the results come from 20% of the effort. For example, business owners who apply Pareto’s Principle often discover that 20% of their clients are responsible for 80% of their revenues. The remaining 80% of their clients simply constitute additional work that limits their efficiency.
Although it’s been in existence for several years, the 80/20 principle has enjoyed renewed popularity thanks to the success of The 4-Hour Workweek by Tim Ferriss. In this book, Ferriss explains how he uses the 80/20 analysis to boost his efficiency in various areas of his life, from starting businesses to learning a new language. By identifying where his efforts yield the greatest rewards, he’s able to eliminate the work that doesn’t contribute substantially to his goals.
You can do the same. For instance, perhaps you have a side business as a freelance writer (or graphic designer, or editor, or social media professional, etc.), and while your business does provide you with additional income, it also involves a significant amount of effort on your part.
To perform an 80/20 analysis on your freelance business, you would need to monitor yourself for at least a week, keeping track of how much time you spend on each client’s account, and how much income that works translates to. After the week is over, take a close look at your findings. You’ll very likely discover that approximately 20% of your clients generate about 80% of your income. With this knowledge, you can step back from the clients who aren’t contributing substantially.
Those who regularly apply the 80/20 principle would encourage you to take the process a few steps further. If you’re a freelance writer, your work probably involves more than just writing. You also conduct research, keep clients updated, manage a project calendar, submit invoices, and more. But just how much are these tasks actually worth in monetary terms? If, after your 80/20 analysis, you determine that they’re not crucial, you can outsource them to freelancers. Although doing so will require spending some of your funds, a truly detailed 80/20 analysis will indicate whether the amount of time you’re wasting on them is worth the money.
While you can never turn a freelance writing business into a completely passive form of income, you could substantially decrease the amount of effort you devote to your business. With the time you save, you can pursue additional high-paying clients, create another side business, or simply indulge in a hobby.
Ferris and others also recommend using an 80/20 analysis to simplify learning processes. If you’re not currently a freelancer, this can help you come up with an idea for a source of passive income.
A common strategy for people seeking passive income opportunities is to publish an eBook and sell it online, using a blog to attract customers. While effective, this approach often requires learning how to format an eBook, design a website, manage a blog, etc. People frequently get overwhelmed as a result, believing that they don’t have the time to learn everything they need in order to create this type of business.
By applying the 80/20 principle, you’ll find out that 80% of the learning you need to do involves only 20% of your efforts. Ferriss often uses the example of acquiring a language. In nearly all languages, a relatively small number of words represent the vast majority of written content and verbal conversations. By memorizing these words and simply watching a familiar show or movie with subtitles in your target language, you can dramatically reduce the amount of time it takes to achieve fluency.
The same principle applies to anything you’re trying to learn, whether it’s how to draw more traffic to your website or how to come up with your next idea for a passive source of income.
As you work on developing passive income sources, always keep the 80/20 rule in mind and monitor yourself rigorously. If you can determine where your efforts are most valuable, you’ll be much more successful.