Parkinson's Law - Amount of Return is More Important than Rate of Return
Parkinson's Law is a really interesting one. It's more of an observation, like Moore's Law of semiconductor density.
In its original formation, it says that work expands to the time allowed for it.
So if someone has 1 day to complete a task, it will take 1 day.
If 7 days are allowed, it will take 7 days.
Maybe a project will take 2 years. Then it will take at least 2 years.
For the financially minded, Parkinson's Law takes the form that expenses rise to meet income. As you make more money, your taste for the nicer things increases.
Where's All the Money?
And I can tell you from dealing with thousands of people's financial situations that Parkinson's Law is 98% true. Everybody is broke. It doesn't matter how much people make. It's all gone out the door in short order.
Yes, the people who have higher incomes spend it on fancier things like cars, houses, private schools for their kids, and so on. But it's all gone.
Everybody. Is. Broke. (Well 98% anyways)
So what does this have to do with amount of return and rate of return?
What I mean is that the amount of money you have invested and working for you is more important than the rate of return in the majority of cases. Yes, if you got in on BTC at 0.05 and hodl'ed all the way that's an exception, but I'm talking about the majority here.
Whether you get 4% or 11% on your portfolio doesn't really matter unless you actually have money put to work.
Alice and Bob
Let's look at Alice and Bob.
Alice invests 30% of her 50,000 USD income. She's not a great investor though. Over 25 years, after fees, taxes, and so on, she averages 4% ROI.
Bob is a much better investor. He makes 9% net after all fees and taxes. He beats the market consistently over 25 years. The only problem is he spends what he makes and only manages to invest 4% of his 50,000 USD income.
But that's OK, right? The magic of compound interest should help Bob come out well in the end. Right?
Wrong.
Over a 25 year span, Alice amasses 650k USD while Bob only reaches 185k USD.
Oh, and by the way, the median retiree's 401k balance is in the 170k USD ballpark.
With enough time, yes Bob would come out even and pass Alice. The problem is they'll both be dead by then.
And yes, there is a mathematical breakeven for any given time period between the factors of percentage of income invested and ROI differences.
But I'm not talking about pie in the sky theories. I'm talking about real life, here and now.
Here and now, very few people save and invest anything substantial. And that's why 95% of Americans have virtually nothing when they retire and rely heavily on Social Security.
But if you've been paying any attention at all over the last decade, you'll know that the demographics of the US and most of the industrialized world have shifted dramatically and old age public retirement plans are in for serious problems soon.
Options
So you (and I and everyone else) have a few options:
- Invent the next killer app and become a billionaire. Hopefully you don't blow it all and you live comfortably for the rest of your life.
- Put it all on crypto and wait for the next m00n. This may actually work as the asset class becomes more mainstream. Unless you put your money into the next bitconnect.
- Become an entrepreneur who knows how to raise capital and put it to work effectively. Get rich on OPM.
- Get radical on your income to expense ratios and put your earnings to work. Be the Richest Man in Babylon and then some.
One of these is much more doable than the others.
While ideally you get a lot of money working for you and it does its work very efficiently, it's a mistake just to focus on ROI.
It can be some truth to this. Personally, I have tried to use to consume more of what is valuable (silver items) etc. So I end up 'saving' while consuming.
That’s interesting.
How are you using silver to consume? Is that just bullion stacking or does it include using real silverware and such?
For example, I try to replace some of the items I use with silverware and candelabra etc. Also, I try to buy for example some art with a respectable artist instead of wasting it on some consumable. The idea is to invest will you feel like you are consuming. I of course 'invest' the ordinary way too.
I think that's a great idea
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I can't remember the exact statistic, but I think it's something in the order of 96% of billionaires became rich by starting (or buying) a business and working hard.
Sure, we all hear stories of people becoming dotcom billionaires, trading billionaires etc but those are a tiny fraction of a percent of rich people.
I'm not saying don't trade or invest in crypto, just have realistic expectations.
That's probably pretty accurate. Very, very few people will approach billionaire status (at least in 2018 dollars/euros).
Millionaire is easily in reach for people making average incomes over a decade or two though - if they get serious about it.
That’s me sadly, not enough money to put in!
This is why everyone needs to do their books
Very nice sharing, thank you.
Indeed, I believe in that fact that people tend to get overconfident if they have investing skill, which eventually leads them to overspend their saving.
I have been in the same situation before. I used to feel too confident that I can handle things without worrying in term of cash.
I was wrong. However, it's not late to change your bad habit.
@therealwolf 's created platform smartsteem scammed my post this morning (mothersday) that was supposed to be for an Abused Childrens Charity. Dude literally stole from abused children that don't have mothers ... on mothersday.
https://steemit.com/steemit/@prometheusrisen/beware-of-smartsteem-scam
And the reason why is because @therealwolf is disgusting slimy pedophile that enjoys abusing kids. Here's proof of him upvoting child porn on the steemit blockchain. bigbadwolf indeed.
And the reason why is because @therealwolf is disgusting slimy pedophile that enjoys abusing kids. Here's proof of him upvoting child porn on the steemit blockchain. bigbadwolf indeed.
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