I read some really good stuff recently about the phenomenon known as Parkinson’s Law. I came across this topic via a member of forexfactory.com, a forum that I visit often. I highly recommend going here, scrolling to the bottom, and downloading the two PDF files that are offered (I’m not an affiliate to this website). They are both free, quick to read, and contain some really good stuff. I won’t try to offer a summary of Parkinson’s Law in general here, as TwoBlink did an excellent job doing just that.
I will, however, talk some about Parkinson’s Law as applied to finance. Parkinson’s Law of Finance states that ‘expenses expand as to fill the available budget’. This one little statement is an unbelievably powerful key to our financial health.
Essentially, expenses will almost alway grow as income does. There are millions of people out there who live their lives like this: They are making say $40,000 a year and just can’t seem to get ahead. There’s never much money left at the end of the month. If only they made $5,000 more they would be fine. Well, they get their promotion, and guess what? They have the same problem when they make $45,000. If only they made $50,000 they would be OK. On and on this cycle goes… Parkinson’s law is the reason why people making six-figures can be stuck in a financial rut while somebody else making half that is in excellent financial shape.
The problem is that people allow their expenses to rise in lock-step with whatever they make. Without even thinking twice, people allow their spending habits to correlate with their income. They start buying more unnecessary crap, want bigger and better things, and they forget about money-saving habits that were essential at a lower income. All of a sudden that extra income is spoken for and there still isn’t anything left to save.
The result? They aren’t any better off even when they make more money. In fact, people actually become more stressed and uneasy about their finances. They still wonder why they can’t get ahead, and now they have a higher standard of living to support. I agree with TwoBlink, or Albert, in saying that Parkinson’s Law of Finance is the key reason why some people become wealthy and many do not. The good news is that it can be overcome.
How to beat Parkinson’s Law of Finance:
1. Recognize it- It’s much more difficult to fall victim to psychological pitfalls when we are consciously aware of them.
2. Pay yourself first- by saving a certain percentage, say 15%, of all income, it rises accordingly with our total income increases.
3. Increase the amount you pay yourself- As we earn more money, we should be able to gradually save a bigger percentage. For example, recent college grads may only be able to put away 5% of a consistent basis, but those with more financial footing should be able to save more.
That’s pretty much it. Defeating this law is not difficult at all, which makes it ironic how so many people fail to do so. All it takes is some foresight and a little bit of dedication. By following these steps, you’re almost guaranteed to become wealthy over time without sacrificing too much today. Don’t let Parkinson’s Law sabotage your finances!
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