Paul Ferraresi

Over the years I have learned great principles of wealth building. One of them is Parkinson’s Law.

A. Why People Succeed or Fail
Parkinson’s Law is one of the best known and most important laws of money and wealth accumulation. It was developed by English writer C. Northcote Parkinson many years ago and it explains why most people retire poor.

B. The Way the Law Works
The law says that, no matter how much money people earn, they tend to spend the entire amount and a little bit more besides. (The proof is if you have outstanding credit card bills.) Their expenses rise in lockstep with their earnings. Many people are earning today several times what they were earning at their first job. 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.

C. The Key to Financial Success
The first corollary of Parkinson’s Law says: “Financial independence comes from violating Parkinson’s Law.”

D. Parkinson’s Law explains the trap that most people fall into. This is the reason for debt, money worries and financial frustrations. It is only when you develop sufficient willpower to resist the power urge to spend everything you make that you begin to accumulate money and move ahead of the crowd.

E. Slow Down Your Spending
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.”

F. This is the key. I call it the “wedge.” If you can drive a wedge between your increasing earning and the increasing cost of your lifestyle, and then save and invest the difference, you can continue to improve your lifestyle and make more money. By consciously violating Parkinson’s Law, you will eventually become financially independent.

Increase Earnings

Savings

Keep Expenses Constant

G. Action Exercise
Here are two things you can do to apply this law immediately:

· First, imagine that your financial life is like a failing company that you have taken over. Institute 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. Remember you can rationalize everything as a fixed expense. Clothing and entertainment are NOT fixed expenses. Here’s a trick…. Make believe you lost your job and NO money is coming in….. Now what expenses HAVE to paid to survive?… Hmm! What happens to Cable TV?… It changes from a fixed (I need to survive) expense to a variable (I want it) expense. You see the problem is “Need versus Want” How much vacation or pairs of shoes do you need versus want. I am not saying you must go on a diet of “franks and beans.” Look at the things you “want”… write them out on a list, but budget for them, and then when they go on sale, consider buying. Say you “want” a new set of towels for the bathroom…. “White sales” are twice a year. If you have to buy them, then get them on sale. Trust me the toilet, bath tub and your guests do not know you got them on sale. And, if you did “SAVE” money on the purchase, then, physically take the amount you “saved” and place it in your investment account. Otherwise, you never really “Saved” the money.

· People tell me they can not save 10% of their income. If your taxes go up 10% (which they will) you would learn to live on a lesser take home. So set aside a MINIMUM of 10% of your gross income to savings/investing. By the way this 10% does not include any money set aside in a 401K or company plan, which is additional and separate. So I am saying live on 90% today and save 10% for tomorrow. What do most people do with a raise or bonus before they get it? Spend it. That is what losers do. You are NOT a loser. You are a winner. You never had this raise or bonus anyway, so, by saving 90% of the raise or bonus, and, spending 10%, then, that is still 10% more to spend than you are currently spending now. (Or do 80%-20%)

H. 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.

You see it is not how much money you make that counts… it is how much you keep that counts. This is what the wealthy do! What did mom and dad teach me… if you want to be wealthy do what wealthy people do…if you want to be poor do what poor people do…DUH!

Stop and look at how much you have earned from your first job until today…what do you have to show for it? The way most people handle their finances; well, if they were the leader of a large company, and, handled the company’s money the same way… they would be prosecuted for misappropriation of funds. You are the President of your own company…called You,Inc. Then, act like a President.

Let me know the little “savings” tricks that have worked for you in our comments section.