Many people retire poor. Why? Parkinson’s Law, developed by English writer Cyril Northcote Parkinson in the 1950s, gives us a few clues.
The way the law works
No matter how much money people earn, they tend to spend the entire amount and a little bit more besides. Their expenses rise in lockstep with their earnings. Many people are earning today several times what they were earning when they started working life. However, somehow, they seem to need every single penny to maintain their current lifestyle!
The key to financial success
The first corollary of Parkinson’s Law says: “financial independence comes from violating Parkinson’s Law.”
Parkinson’s Law explains the trap that most people fall into. This is the reason for debt, money worries and financial frustration. It is only when you develop sufficient willpower to resist the powerful urge to spend everything you make that you begin to accumulate money and move ahead of the crowd.
The second corollary of Parkinson’s Law is: “if you allow your expenses to increase at a slower rate than your earnings, and you save or invest the difference, you will become financially independent in your working lifetime.”
In other words, if you can drive a wedge between your increasing earnings and the increasing costs of your lifestyle, and then save and invest the difference, you can continue to improve your lifestyle as you make more money.
Here are two things you can do to apply this law immediately:
Firstly, imagine that your financial life is like a failing company that you have taken over. Implement an immediate financial freeze. Halt all non-essential expenses. Draw up a budget of your fixed, unavoidable costs per month and resolve to limit your expenditures temporarily to these amounts.
Carefully examine every expense. Question it as though you were analyzing someone else’s expenses. Look for ways to economize or cut back. Aim for a minimum of a 10 percent reduction in your living costs over the next three months.
Secondly, resolve to save and invest 50 percent of any increase you receive in your earnings from any source. Learn to live on the rest. This still leaves you the other 50 percent to do with as you desire. Do this for the rest of your career and you will probably find you can afford to retire sooner than you think!