Sunday, June 8, 2008

 

The Key To Financial Freedom - Break Parkinson's Law

We all want financial security and freedom, and all the joys associated with them. In this article I will discuss how you must break one of the fundamental laws of modern society to ensure you can achieve them.

We are all subject to laws over which we seem to have little control, all of us will admit to being victim to the 'Two socks in, one sock out' law when washing our clothes. Most people will swear blind they must have dropped some money in the casino when they come out with much less in their wallet than they were expecting, that is the law of 'Casino Amnesia' at play.

A more pertinent law to our daily lives is Parkinson's Law. This was coined by the late Cyril Northcote Parkinson, a prolific author born at the start of the 1900's. His 1958 book, Parkinson's Law was an instant best seller due to his cynical humour, satirical writing style and hidden truths.

The basic premise of the law is that, 'work expands to fill the time available for its completion'. We are all guilty of this, have you ever noticed how at work when you are not busy you still work all day, but you tend to get much less done in a day than when you are busy?

This has since been applied to various aspects of life. One area in specific is personal wealth, where it is said that our expenses increase in line with our income. So as we earn more, we also spend more. When you get a pay rise you realise you 'need' more things.

As most of the world spends everything they earn each month, plus a little bit more, then you can see why people have a hard time becoming financially free. If you are saving you are spiralling into wealth, if you are spending more than you earn, you are spiralling into debt.

So it is essential that you break Parkinson's Law when it comes to your income, if you want to become financially free and secure. The flip side of the law is that if you make your income smaller, then you expenses will be smaller too...

"Hang on Steve, how can taking a pay cut make me wealthy?"

I don't mean take a pay cut! I mean make do with less money. If I gave you 500 to last the month, then you would spend 500, if I gave you 1000, you would probably spend 1000. We 'make do' with what we have.

So the key to making this work is to save 10% of your salary every month, before you get the chance to get your hands on it.

Banks are quite accommodating today (if yours isn't then you might consider moving...) and as people tend to get paid on a set day each month, they will happily set up a standing order to transfer money out of your account each month and into a savings account.

The first month may be hard as you know there is that money sitting there and you will be tempted to dip into it for some 'emergency' that you can manufacture. If you can get past the first month I assure you it is far easier.

Soon it becomes a habit which you barely notice, and every month you are increasing your net worth, spiralling into prosperity, and building a nest egg for those real emergencies.

You might even consider increasing it to 15 - 20%, but always make sure that when you get a pay rise, you increase the standing order accordingly, and any bonuses are split 50/50 between you and your savings account.

I know, saving is not as glamorous as earning money, but there is no stronger force in nature than the force of compound interest, isn't that 'earning'?

If you invest just 3.29 a day at 10% you will have 130,000 after 25 years, at 6.58 you will have 260,000 and at 11.51 you will have 454,000. Quite a nest egg, don't you agree?

The most successful people in life sacrifice in the short term to gain in the long term, the rest do just the opposite.

Start cutting your expenses and saving today, you deserve a comfortable and secure retirement.

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