It is this last one that has such important implications on personal finance and budgeting .
What it says is that , if you want to save for the future and typically for retirement , you want to open that vital gap between what comes in and what goes out . You must not focus on what comes in .
It is a fallacy to think that “ I shall start saving when I earn more ”.
If you wait to start saving only once you earn more , then saving is never going to happen as our lifestyles will merely evolve until expenses meet , or sadly for many of us , exceed income .
Saving is not income-dependent , it is expense-dependent . It is not an attacking game . The focus should be on defence , on what leaves our pockets . First , put the savings away . Pay yourself first . Or as Fourie advises :
“ Take tomorrow ’ s money off the
table , first . It must be as if it has never
even been there .
”
Reduce the income to a new level . And then , by Parkinson ’ s Second Law , expenses will rise to meet ( that new , reduced ) income . It is the only way to financial independence . It is the only way to open that vital gap . And it does not depend on ( higher ) income . It is all about budgeting , and budgeting for savings first . In fact , it is one of the first principles of personal finance .
The upshot to this is that you should also not fool yourself by paying off your debt before you start saving . That start date might never arrive . Too many have paid off ever-more debt their whole life and arrived in their 50s with almost nothing in the tank in terms of savings for the future . They are often doomed to have worked their entire lives for nothing .
Again , Parkinson ’ s Second Law says pay yourself first , put away those savings first . Then , by all means , pay off as much as possible debt with what is left , as fast as you can . Because expenses will rise to meet the income that is available after the savings and the extra debt repayments . In that way , one can start saving early and compounding can work for you , and you will most likely have less debt also , as the budget to service it is smaller .
Back to Parkinson ’ s hypothetical little old lady writing the postcards . If she had given herself a tighter deadline , she would have probably finished faster . But with nothing else to do all day , she finished just in time . Blessed is she to not have other competing priorities . But then , for our little old lady , the deadline might still have been stressful .
Perhaps a final corollary is : “ The worry , stress and angst in our lives will usually remain at more or less the same level , filling the same capacity , irrespective of the task at hand !”
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