The first time I heard about Parkinson’s law about 10 years ago, I actually confused it with Parkinson’s disease. Parkinson’s disease was made popular by a famous boxer who was noted with several quotes, one of which is ‘Float like a butterfly, sting like a bee’. On taking a second look at the title of the article, I noticed it was Parkinson’s law not Parkinson’s disease, and that got me interested. So what exactly is Parkinson’s law? Parkinson’s law is actually a law of productivity. The law states that “Work expands to fill the time available for its completion”. For the purpose of this article, I want to look at the application of Parkinson’s law in Personal Finance.
When applied to personal finance, Parkinson’s law states that expenses always match income. This implies that when income increases, expenses always increase to the same level as income. Should expenses, always increase to the same level as income? Ideally, it should not be, this is because, according to George S. Clason, author of the Richest Man in Babylon, we should pay ourselves first. Paying ourselves first, means that when we receive our income, the first thing we ought to do is to dedicate at least 10% of our income to our savings. However, when Parkinson’s law sets in, it is difficult for us to have a savings culture.
When Parkinson’s law sets, in we use our income to finance our consumer lifestyle. A consumer lifestyle is one which only focuses on acquisition of consumer items only and does not cultivate a savings and investment culture. In addition, when Parkinson’s law sets in, every increase in income or bonus, is used solely for the purpose of financing a consumer life style.
Does that mean that all increase from a promotion, pay rise or bonus should be saved? By no means no! After all, we have worked hard for that promotion, pay rise or bonus, so we deserve to enjoy the good things of life. However, so that Parkinson’s law does not set in, we need to be wise in the spending of any increase in income or bonus. By this I mean, if you have received a pay increase of for example N100,000 for the purpose of illustration, you can dedicate at least 10% of this increase to a dedicated savings account for investment purposes, and live off the remaining. I say at least 10% because it can be more, 20%-30%, depending on your financial capability. The purpose of this savings is a means to an end, the end being investment in assets that will appreciate in value over the medium to long term and will also bring in investment income. Assets that fall in this category include stocks, bonds, land or property, however, investments in assets should be done after due diligence and consultation with experts.
One of the reasons why Parkinson’s law sets in is because of our consumer driven world. Moreover, advertisers do not make things any easier. The latest phones or cars are constantly advertised and they make us feel, if we don’t have the latest this or latest that, then we are missing out. A young man once mentioned that prior to 2016, he changed his phone every four months, because he must always have the latest phone in town. However, recent economic realities, have dawned on him and he has not been able to maintain that lifestyle. Another reason Parkinson’s law sets in is because we want to keep up with the Joneses, because our friends or neighbours have something, we feel we must have it as well, not bothering to know how they got it. This lifestyle has resulted in many financing a consumer life style with tomorrow’s earning. Last, is the culture of immediate gratification, we live in a world of instant everything (instant coffee, instant noodles, instant everything!) and we want everything, now! We don’t want to save, neither do we want to wait, we must have it now, and this lifestyle is fraught with many negative consequences.
One of the reasons why we should not allow Parkinson’s law to take place in our lives, is because it prevents us from building of an investment portfolio. Oftentimes, we feel that there will always be time to save, however, this may not be so. A Chinese proverb says the best time to plant a tree was 20years ago, and the second best time is now. This means that all things being equal, ten naira saved 20 years ago, should have increased in value and is not the same as ten naira today. This is because of the power of compounding interest.
To be fore warned is to be fore armed. Now that we know about Parkinson’s law and personal finance, I trust that we will not allow Parkinson’s law to affect us negatively. Rather, we will allow compounding interest to work for us, this season and always!
Dr Adeola Agbato
Head, Corporate governance and Special Programmes Unit