Most people retire poor, or at least they don’t fulfil their dreams. That seems to be the consensus of statisticians and academic studies. In the UK, nearly 2 million pensioners are defined as being in poverty, according to Age UK. That means living on less than 60% of the UK’s average income.
Many more don’t meet the definition of living in poverty, but they’re certainly not living their dream retirement. Only about 5% of people will reach financial freedom at retirement. Everyone else will rely on state pensions, other benefits and / or will have their lifestyle choices curtailed to some extent.
There are concerns that around 10 million UK residents could be heading for insufficient retirement income. In today’s more transient job market and the demise of final salary pensions, individuals must prepare for their own financial security. We can no longer rely on employers and the state for a comfortable retirement.
So why do so few people reach financial independence? For some, it’s simply not possible to build wealth. Physical or mental health issues can be a barrier to earning money. As can spending many years as a carer. Staying at home to look after children and run the household is an unsalaried job with no pension contributions.
For most of us, though, it comes down to imperfect financial behaviours and a possible lack of financial education. I’ve been guilty of poor financial behaviour in the past. I still can be, to an extent, so please don’t think I’m preaching here.
One key reason for these imperfect behaviours comes down to an observation by British naval historian and author, C. Northcote Parkinson.
Parkinson’s 2nd Law
“Expenditure, or money paid out, rises to meet income”Parkinson’s 2nd Law
In other words, no matter how much people earn, they tend to spend the entire amount – and a little more besides.
Cyril Northcote Parkinson is better known for his first law, which was published in the Economist in 1945. It stated that “work expands to fill the time available for its completion”. It later became the focus of his book The Pursuit of Progress.
The principle applies to income and expenditure, as well as work. When I look back over my working life, annual pay increases and promotions meant more money for spending. That’s what everyone does, right?
Well, not quite. Financially literate people will use at least part of a pay increase to boost their savings habit and nurture their wealth.
So, if we know this “law” exists, what can we do about it?
Violate Parkinson’s Law
Consciously break Parkinson’s Law daily. This is the secret to financial success.
You know the phrase “live within your means”? It’s accepted wisdom that you should spend no more than you earn. But most people have mortgages, loans and credit cards to deal with. That’s on top of all the usual monthly expenses. It’s hard to spend less than you earn consistently. This is because unexpected bills come in. House repairs, car breakdowns, irresistible offers on holidays or other tempting deals.
People tend to start each month with the best of intentions. To be careful with their spending, then save what’s left over at the end of the month. But for the vast majority of folk, this doesn’t work. It doesn’t work for me and it probably doesn’t work for you.
So what’s the answer?
Pay Yourself First
This is a financial behaviour that says “I matter”. You prioritise your long-term financial wellbeing and create more of a balance against the relentless short-term bills, purchases and entertainment.
It simply involves setting up an automatic savings payment to come off your regular income first. That is, before you account for bills, mortgage or rent, food and leisure spending. Set up standing order with your bank so you don’t even need to think about it.
Read more about this in my previous blog here.
Savour Your Spending
This is a phrase I use to help encourage mindful spending. Be conscious of spending decisions and appreciate every transaction you authorise.
It’s really about budgeting, of course. But the word “budgeting” sounds a bit too boring. A bit too sensible.
Earlier this year, I went through a wee phase of counting calories to help lose a few pounds. It worked, although I did feel hungry all the time, at least for the first week or two.
What I did realise, though, is that I came to appreciate every single piece of food. Even the yoghurt scraped off the foil lid, and healthy stuff like granola. Because I was logging it and tracking the calorie intake, I came to savour every single morsel.
The same principle can apply to money. If you log your spending and focus on keeping money aside for the future, you come to appreciate every pound that goes out. For example, it prompted me to switch energy suppliers and I now savour the £10 saved per month.
Imagine Your Future
Once you recognise the power of Parkinson’s Law, you can make conscious choices to avoid it . You can choose to actively violate that law every single day.
Develop the habit of paying yourself first and begin to savour your spending.
Then give yourself permission to dream a little. Visualise how you would like your future to look and know that you have taken steps towards it. Then allow momentum to build and enjoy the compounding effect of regular savings and time.
Nearly anyone can reach financial independence, given time and the right financial behaviours. It’s a question of how much time and how well you violate Parkinson’s Law. And that comes down to your personal circumstances and desired lifestyle.
If you need help to reverse the effects of Parkinson’s Law, financial coaching may help. A half hour chat over a virtual coffee might be all you need to get the ball rolling.