Northcote Parkinson termed the phrase Parkinson’s Law in the 1950’s. The law states that “as the supply of a resource increases, so does the demand for that resource”. Here are some common examples:
Your computer’s data will expand to fill exactly the amount of storage it has available.
The amount of time you have to complete a task is exactly the amount of time it will take.
The amount of clothes and shoes you have will completely fill the amount of closet space you have available.
In other words, the more of something you have, the more of it you will use.
So how does Parkinson’s Law relate to wealth?
Very simply – As your income rises, your expenses will rise in equal proportion. No matter how much money people earn, they tend to spend the entire amount. Their expenses rise in lockstep with their earnings.
Many people are earning today several times what they were earning at their first jobs. But somehow, they seem to need every single penny to maintain their current lifestyles. No matter how much they make, there never seems to be enough. That’s the result of Parkinson’s Law.
But when I speak to people about Parkinson’s Law, I like to modify it slightly. What I see, is that when a person’s income rises, many times their expenses rise in greater proportion.
What does that mean in plain English? The more money you get, the more, and more, you’ll spend. While income increases grow linearly, expenses can grow exponentially. This means you may actually end up poorer even after your income increases! How can you be poorer, you ask, if you’ve got more cash coming in?
Here’s an example: Let’s say Mary used to make $40,000 a year. Due to her hard work, she now earns $50,000 a year. A big increase in her income! What does she do?
If she’s like many people, she sells her perfectly fine older car (the one that was paid off) and buys a brand new set of wheels. Now she has big monthly payments. Her insurance is also higher now that she has a more expensive car.
There goes some of that pay increase.
Feeling empowered financially, she replaces the perfectly fine furniture in her house, with new contemporary furniture.
There goes more of that pay increase.
The new contemporary furniture starts to make the other furnishings look dated and stale, so she splurges on complete room makeovers to make everything match.
Even more of that pay increase disappears.
Her lifestyle starts to change. She eats at more expensive restaurants, goes to trendier bars. She lives it up.
More of that pay increase disappears.
She uses her credit card more often. She buys that expensive designer handbag she always wanted and that “light as air laptop” as well and while she’s at it, a few more toys.
Goodbye pay increase.
Then she goes to her ATM and checks the balance on her account. It seems low. Very low. She’s confused. She just got a pay raise not too long ago. How can it be that low?
She gets her credit card statement in the mail. The balance has increased by 30% from what it is normally. That 30% is exactly the increase in her salary, plus a little more. She always seems to be short on cash now.
What’s going on here?
Mary has succumbed to Parkinson’s law.
And she’s not alone. Many people succumb to Parkinson’s Law every day. I’m sure everyone reading this knows somebody who is a perfect example of Mary. And the sad thing is that people who succumb to Parkinson’s Law are worse off, not only financially, but mentally and emotionally as well, because they feel stuck, like they are never getting ahead in life.
This is why I want you to break the law. That’s right. It’s time to violate Parkinson’s Law. Because the first step towards financial freedom comes from separating yourself from habits and ideas that are not working for you financially.
How can you do that? Here are a couple of ways:
Be A 10 Percenter
Resolve today that you are going to save and invest at least 10 percent of your income throughout your working life. Take 10 percent of your income off the top of each paycheck and put it into a special account for your retirement. The beauty of this is that it will automatically adjust as you make more money, because the percentage deducted stays the same. Here’s the advantage – If you save just $100 per month throughout your working life and you invest that money in an average mutual fund that grows at 10 percent per year, you will be worth more than one million dollars by the time you retire. This means that anyone, even a person earning minimum wage, if he or she starts early enough and saves long enough, can become a millionaire over the course of his or her working lifetime.
Give Yourself A Savings Raise
Let’s say you earn $3,000 a month. The rule of thumb that I mentioned above is save 10% first, which comes out to $300. If your income rises to $4,000 a month, try saving even more than the 10% (now $400 a month) if possible. Why? Because chances are, your expenses will rise proportionality greater than your income (my amendment to Parkinson’s Law). So try to save a little more to offset that. Instead of saving just 10%, try saving 15% ($600) a month. Think of this as driving a “wedge” between your increased earnings and the increasing costs of your lifestyle. Knowing Parkinson’s Law, your forcing yourself to have a smaller amount to work with in your checking account.
Change One Thing
If you’ve been working hard and got a raise, it’s also important to reward yourself. Allow yourself to make a one minor change in your monthly expenses. For example, allow yourself one nice dinner out a week or shop at the better grocery store from now on. Be careful though and don’t make one thing many things. Most people get into trouble believing that they can make a lot of adjustments as soon as they get a raise, hence the reason that increased expenses can out-run an increase in income. Remember, the easiest person to fool is yourself and self-deception is the worst deception.
Always Leave Home Without It
On days where you know you’re going to be tempted to spend a lot of money, try to bring a limited amount of cash instead. If possible, leave the credit cards at home. Unlike the popular slogan, you can leave home without them. Otherwise, due to Parkinson’s Law, you’ll be tempted to spend more than you have . Use cash. It’s a great modulator.
Force Yourself To Look At The Scary Numbers
Retirement statistics are very scary. The Federal Reserve reports that 59% of people age 65 and older have absolutely no retirement assets. According to insurance industry statistics, only one out of 100 people who reach retirement age will be wealthy. Only four out of the hundred will be financially independent; fifteen will have some savings put aside. And the remaining 80 will be dependent on pensions, family, still working or broke – this is after a lifetime of well-paid work in the most affluent society in human history. Now why does this happen? They succumbed to Parkinson’s Law.
Look at the retirement statistics often and let them remind you of how most people are failing with money. Then tell yourself the truth – if you do what most do, you’ll get most what have, which isn’t much.
By violating Parkinson’s law, you not only save more money, you automatically build self-control and discipline, which are two very valuable skills needed to be financially free. W. Clement Stone once said, “If you cannot save money, then the seeds of greatness are not in you.”
Parkinson’s Law is another great reason to not wait to start saving until your income rises. Do it now. Because if you wait until your income increases, chances are you’re not going to start saving more at that time. You’ll put it off and succumb to Parkinson’s Law.
Saving is just like brushing your teeth, something that must be done every day. Saving is a habit. A habit anyone, on any income, can form. Do you have the seeds of greatness in you? Break Parkinson’s Law today and chart a new course to financial freedom.
Be free. Nothing else is worth it.
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