Have you heard about the ‘Wedge Theory’ technique? It is guaranteed to make you financially independent faster than you can even imagine.
Parkinson’s Law, developed by author C. Northcote Parkinson, says, “Expenses rise to meet income.” This means your expenditures increase gradually in line with the gradual rise in your income. No matter how much money you make, your expenses eventually rise to consume it all, and a little bit more besides. Over time, you develop the habit of always spending whatever you earn or receive.
Brian Tracy asks his audiences this question: “If I could wave a magic wand and double or triple your income, would that solve your financial problems?”
Then he waits and watches their faces. Almost immediately, people raise their hands, smile, and nod. They all agree that if they could double or triple their current incomes, that would solve all their financial problems.
Then he ask a follow-up question: “Going back to what you earned in your first job, is there anyone here who has already doubled or tripled their income?”
After a short pause, virtually everyone in the audience raises their hands. Everyone has already doubled and tripled their incomes from their first jobs. Many have increased their incomes five and ten times from the first job they took when they left school. They still have financial problems and are in debt because they have become subject to Parkinson’s Law, “Expenses rise to meet income.”
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki
Save & Invest Half of Your Future Increases
Here is how the Wedge Theory works. When you ask a person to save a certain percentage of their current income, they will almost always agree that it is a good idea, but they will also claim it is not possible. To save out of your current income will mean reducing your standard of living. It may mean moving to a smaller place, driving a smaller car, eating cheaper foods, or not going out as often.
People are addicted for immediate gratification. Whenever they get the rise in their income, they are habitual to work out the ways on how to spend this additional amount. And there are plenty of ways available. Even if they can rationally agree that saving is a good idea, the actual reduction in living standards it requires is so unacceptable that they cannot discipline themselves to take the first step.
Wedge Theory is different. Instead of cutting back on your current lifestyle, you commit to save 50 percent of every increase you receive from your work from this day forward. This is something you can do because you don’t yet have this money built into your daily expenditures. It is much easier for people to commit to saving money they have not yet received than it is to get people to agree to save money by cutting back on their current standard of living.
Keep on investing this saved amount, progressively by the power of compounding, you will be able to increase your income by 5 percent, 10 percent, and even 25 percent per year. To become wealthy, you must develop the habit, starting today, of saving fully 50 percent of these future increases. You can still spend the other 50 percent on whatever you like, but you must agree to save & invest half of the money you don’t even have yet. This should not be hard for you.
Depending upon your age, and the rate at which your income grows, saving 50 percent of your increases in the years ahead will soon allow you to acquire an enormous amount of money. And the more money you save, the more money you will attract to yourself. By disciplining yourself and developing the habit of saving & investing half of your increases for the rest of your career, you will pay off all your debts, build an enormous financial fortress, and eventually become financially independent.
Adopt the Habits of Wealthy People
Millionaires develop a series of habits to ensure that they don’t lose money and that their money grows steadily over time. You can adopt some of these habits. Like, apart from the above wedge theory, you can develop a habit of getting good financial advice before you do anything with your investment account. Your investment account, in which you keep above additional money, must be separate from your routine saving account. Ask around and find a financial advisor who has already become financially successful by investing her personal money in the areas that she recommends to you. Your ability to choose excellent financial advisors can be a critical factor in making good investment decisions to achieve financial independence.
Develop the habit of investigating before you invest in anything. The rule is, “Spend as much time investigating the investment as you spent earning the money you are thinking of investing.”
Fast financial decisions are usually poor financial decisions. Take your time, move slowly, find out every detail of the business or investment before you ever think of writing a check. Never allow anyone to pressure you into an investment decision. Never allow yourself to feel that an investment decision is urgent and must be made immediately. If you are committed to good investment then you will get the opportunity. Even if you miss one investment opportunity, don’t worry, another opportunity will appear soon. Investment opportunities are like buses; there will always be another one coming along.
Sometimes, the best investments are the ones you never make at all. Make a habit of thoroughly understanding the investment before you ever think of parting with your hard-earned money. If there is anything you do not understand or that seems too complicated for you, do not invest in that area.
Warren Buffett, one of the richest men in the world thanks to his investing acumen, refused to invest in any of the high-tech or dot-com companies during the boom of the 1990s. Everyone accused him of being out of step and old-fashioned. He simply replied, “I don’t understand these businesses and, therefore, I will not put any of my money into them.” He turned out to be right when the tech bubble burst. (Credit to ‘Million Dollar Habits’ by Brian Tracy).
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