In most cases adult life starts out very noble, in fact it’s rare to see school leavers in consumer debt. Then life happens and suddenly our expenses always rise to match our income, inevitably we feel trapped and frustrated. That’s the core definition of the Parkinson’s law in terms of personal finance.
Parkinson’s law is a law of productivity that means “work expands to fill the time available for its completion”. In the financial world we use it for personal finance where it states that no matter how much people earn, they tend to spend the entire amount or more.
Despite people earning more than their first jobs, they tend to use every penny to maintain their current lifestyles. Essentially no matter how much they make, it is never enough, which is what keep most people in the middleclass.
The Parkinson’s Law can explain why some people retire poor and why some succeed. Therefore, in order to succeed and escape the middle class, the key is to break the Parkinson’s law. To do that you need to recognise the urgency of saving your personal finances because the sooner you start, the faster you’ll gain control over your finances. Here are a few tips to get you started:
- Think of your finances as a failing company that needs urgent rescuing. Analyse your income statement (i.e. income vs expense) as well as your balance sheet (i.e. assets vs liabilities). This will give you hindsight of your financial portion. Then set a deadline as to when you expect to have bettered your personal finance.
- Invest in educating yourself on your financial acumen, be it books, youtube, paying for a mentor or even taking classes. You want to surround yourself with people who are where you want to be.
- According to The Wealth Chef by Ann Wilson, keeping 10% of your income and allowing it to gain compound interest, while simultaneously paying double the minimum repayment on your consumer debt – will enable you to get into the habit of investing and settling consumer debt. This habit will give you a sense of control over your finances.
- Breaking the Parkinson law means your expense must increase slower than your income, and you invest the difference. Growing an investment portfolio requires patience, discipline and expertise, therefore find the right people in your team.
- Once you’re comfortable with your investment portfolio, introduce the use of leverage to make you wealthy. This means using other people’s money to make you more money, for example, this can be done by accruing a loan for a rental property.
- With multiple income streams, the advantage of compounding interest should be used to elevate your life. Compound interest is when you have money working for you, which will enable you acquire what your heart desires without getting into debt.
To achieve financial independence, you need to take action as moaning and feeling sorry for yourself won’t get you desired results. Never fall into the trap of impressing people who don’t mean anything to you as that will always revert you back to where you started. What is required is a long-term mindset and always remember that FORTUNE FAVOURS THE BOLD!