Harnessing Parkinson's Law: How to Pay Yourself First and Secure Your Financial Future

A couple of weeks ago, I wrote about Parkinson’s Law. Parkinson’s Law states the idea that we will use resources up to the amount they are made available. C. Northcote Parkinson observed in 1955 that a workforce continued to grow despite the lack of need for it to do so. A similar principle happens in our lives all the time. We’ll take all the time available to complete a task. If you have two weeks for a project, it will take the full two weeks. But, if you only have two days for the same project, you could get it done in two days. In terms of money, this occurs as lifestyle inflation. As we earn more money, we manage to find ways to spend it.

When I wrote about Parkinson’s law a couple of weeks ago, I shared how we managed to reduce spending on food simply by making less money available to spend on food. Through understanding the concept of Parkinson’s Law, we can also increase our savings and make a plan to use unexpected income more deliberately.

You have probably heard the financial advice to “pay yourself first.” This is, essentially, warding off the effects of Parkinson’s Law. By paying yourself first, you make your available income less and diminish the possible risks of lifestyle inflation.  You save for your future and mitigate overspending.

In the Bottom Line method, we do something similar. We create budget categories which make all expenses fixed and generate a more realistic idea of what’s necessary for spending and available to save, invest, or use to pay down debt. Other ways to pay yourself first are to have your bank automatically move some of your income into a savings account as soon as your paycheck hits your account or to have your employer automatically withhold some of your paycheck and invest it into a 401(k) plan. These methods make your available income smaller and thereby limit the effect of Parkinson’s law. All of these methods also are ways to build better habits. By making something unavailable, it becomes unavailable for abuse.  It’s about creating an environment for good habits.

When it comes to receiving unexpected income, consider ahead of time how you would use it. You know what it takes to live on your current income, but if instead you decide ahead of time how you will use an unexpected bonus to save, invest, or pay down debt, you will be more likely to use it in that manner.  Research shows that when someone receives one-time unexpected income, like a tax return, bonus, or gift, they are more likely to use it for a luxury item. Instead, expecting that at some point you will receive unexpected income, plan to use it for paying down debt, building up your savings, investing, and maybe only a small portion for something that is momentarily fun.

Being aware of our tendencies gives us the opportunity to make these decisions thoughtfully and avoid the pitfalls. Pay yourself first to make your available income less, thereby keeping your lifestyle from inflating and securing your future. Be sure to make a plan for how you will use any unexpected income ahead of time.