FP Article 36
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Dollar-Cost Averaging and Value-Cost Averaging,
Valuable 'Wedge' Lesson
by Rajen Devadason
If you can drive a wedge between your
increasing earnings and the increasing costs of
your lifestyle, and then save and invest the
difference, you can continue to improve your
lifestyle as you make more money.
longtime readers - both online and
print - know that I believe
wholeheartedly in the importance of
lifelong learning. Toward that end,
I aim to read the works of and learn
from as many experts as possible.
Three men whose
writings have been of exceptional help in
my personal development are Stephen
Covey, Robert Kiyosaki and Brian
Tracy. In this article, I want to
quickly outline for you just one lesson I
learnt from reading and listening to
Brian Tracy's awesome material. It's
what he calls the 'wedge'.
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
This is an article on Brian Tracy's
cash flow management lesson, which
he calls the 'wedge'. I hope
you enjoy reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
For my own twist on the wedge to
make sense, I first need to give you some background
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
so as to fill the time available for its
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
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:
independence comes from violating Parkinson's
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.
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
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
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
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
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
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© Rajen Devadason