FP Article 36 (For a FREE eReport on Dollar-Cost Averaging and Value-Cost Averaging, click here.)

Brian Tracy's Valuable 'Wedge' Lesson

by Rajen Devadason

When I first heard Brian speak about the wedge in one of his audio programmes, it immediately resonated with me. Over the years I've implemented this core principle of personal cash flow management in my own life and I've also used a variation of it in teaching my best financial planning and life planning clients to wisely handle extra cash that comes their way, say through pay increments, bonuses or large business windfalls.

I'd like to share my thoughts on this powerful lesson by Brian Tracy here... with you.

For my own twist on the wedge to make sense, I first need to give you some background guidance sourced from Brian Tracy's vast body of work, including his books, blog and audio programmes.

Brian has taken a long hard look at what's become known as Parkinson's Law and discovered two powerful reasons for breaking it!

Before I go any further, you might like to know that Parkinson's Law has nothing to do with the neurological ailment called Parkinson's Disease! The disease was named after the English doctor James Parkinson, who in 1817 wrote the first clear description of this condition in An Essay on the Shaking Palsy. The law on the other hand stems from British author Cyril Northcote Parkinson (who earned his PhD from my own university, King's College, University of London!). This Parkinson wrote what follows in a 1955 humorous essay for The Economist:

"Work expands so as to fill the time available for its completion."

Hasn't that always been the case? Well, what I learnt from Brian is that while the original form of Parkinson's Law focused on time, this law also has direct application when it comes to money; in that it is safe to say our personal experience confirms that in almost every instance our expenses expand to use up all available income.

Do you know what I mean?

Because Parkinson's Law is so applicable in the realm personal finance, Brian has drawn two potent corollaries or inferences from the financial version of Parkinson's Law:

1. Financial independence comes from violating Parkinson's Law

2. If you allow your expenses to increase at a slower rate than your income and you save or invest the difference, you will become financially independent in your working lifetime.

Just take a few seconds to reread corollary number 2 and think about what that might mean to you and your family in eminently practical terms. The way Brian looks at it, applying corollary 2 is precisely like driving a wedge between your rising earnings and your inevitably rising expenses.

So, for instance, if your net income were to go up next year by 10% and you proactively decide that you will only allow your lifestyle - as measured by your total annual expenses - to rise by 8%, you will have put a two percentage point wedge between your growing earnings and your ballooning expenses.

Because I like to keep things very simple, though, when I explain this concept to my best financial planning clients I tell them that my own wedge is a slice right down the middle! This means I aim for a 50% net savings rate from all sources of income. This would obviously mean that if I saw a 10% increase in one source of income, I would take half of those 10 percentage points of extra income and channel the money into my portfolio of savings and investments. The other five percentage points would go toward enhancing my lifestyle, which simply means I would spend that money with a completely clear conscience because I knew I would be managing my money well.

I hope this makes sense to you. Does it?

Please note that I always take great care to tell my newer clients that I am not suggesting they do anything as radical as establishing a high 50% net savings rate immediately. Of course, not. That's just insane!

The key discipline is simply to start.

I've had many fruitful conversations with new clients who had always dreamt of being able to save but who never started. Their procrastination stemmed from a sense of simply being overwhelmed at the idea of setting aside even 10% of their income.

My advice to such people, always, is to not get fixated on that 10% or higher supposedly ideal target rate. It's imperative they don't end up inadvertently demotivating themselves.

Instead, I ask if they would be willing to start at the completely un-scary savings rate of... wait for it: 1%.

No one has ever told me that starting with such a microscopic wedge was too difficult. And once a person starts there, it is only a matter of time before that 1 percentage point can be shepherded to 2 percentage points, and then to 3, 4, 5, and beyond.

The keys to success in this endeavour are quickly making a start and slowly making progress.

In closing, I urge you to think deeply about the elegant simplicity of the Brian Tracy wedge. Then resolve to begin using this mental tool to carve out your own course to a bigger, better, brighter financial tomorrow!

Action, you see, is essential. As Brian Tracy puts it, "Make a decision to be successful right now. Most people never decide to be wealthy and that is why they retire poor."

(If you live in Malaysia AND believe you might require my help in the realm of financial planning and retirement planning, you're welcome to learn more about me here.)

© Rajen Devadason