What’s Your Optimal Income?

by RJ

in Psychology

I close each day by deciding  what important needs to be completed the following day. Usually I’ll have three or so tasks I have to get done no matter what. I’m not finished working for the day, until I complete this work.

Next to each task, I write how much time to allocate towards its completion. When it’s time to start working on that task, I set a timer using e.ggtimer.com with this time.

For example, my most important task for today was to write a blog post. I allocated 100 minutes to this task.

This morning before doing anything else, I first headed to e.ggtimer.com and set the timer for 100 minutes. Next, I opened up my word doc and starting writing knowing that I needed to hit publish in 100 minutes.

I would say this one productivity tip I learned from the book The Ultimate Selling Machine has increased my productivity at least 25% and arguably a lot more.

Parkinson’s Law

Why has setting time limits to each task had a huge impact on productivity? The reason being, Parkinson’s Law.

Parkinson’s Law states that “work expands to fill the time available for its completion.”

Therefore, when a time limit is set, I’m telling my brain to stay focus on what’s necessary to accomplish a task.

Parkinson’s Law and Money

Parkinson’s Law can also be applied to money management.

Specifically, expenses expand to match the supply of your income. Meaning, naturally your expenses will increase as your income increases.

I see this a lot from those who just got their first paycheck out of school or those who just received a large increase in income.

Think of a college grad that was lucky enough to get a job paying $40,000 after school. Immediately, they go out and get an apartment. Since they are in the working world they need a new car, wardrobe, and a smart phone.

The reality is that their financial situation is in no better shape than before, and sometimes a lot worse.

Sufficiency, Beyond Sufficiency, and Optimal Income

Every time I’m about to receive an increase in income, I decide beforehand what’s the best allocation for that money. My goal is to not just let it slip out of my hands, without it enhancing the quality of my life.

For example, say my average basic expenses are $3,000 a month. If I was making $3,000, all that I could afford each month is basic food, shelter, clothing, transportation, and medical care for my family. I like to think of this $3,000 a month mark, as being sufficient enough to life a comfortable life.

Next, say I increased my income to $4,000 a month. Knowing that my basic needs are covered, my goal is to allocate this extra $1,000 as to have the highest impact on the quality of my life. Looking at my life’s goals, I decide that the best use of this money is to invest for early retirement.

Now, say I increase my income to $5,000 a month. I again need to ask myself, what’s the best use of this money? In other words, how can I best utilize $1,000 a month to enhance the quality of my life? Lets say, I take this extra $1,000 a month and put it all towards travel. I have my basic expenses met, I’m saving and investing for the future, there is no reason why I can’t put $1,000 away each month for travel.

I encourage you to do this exercise yourself. Start at where your basic needs are met. At each $1,000 increase in income, decide exactly what you would do with that money. The goal is to get to a dollar amount, where another $1,000 increase in income doesn’t enhance the quality of your life.

Personally, I kept on going up until I hit $10,000 a month. After $10,000 a month, another $1,000 a month in income, didn’t have a huge impact on my quality of life. Knowing this, I set my optimal income at $10,000 a month.

Try it out for yourself and share your results in the comments.

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Photo by: Kekermsi

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{ 6 comments… read them below or add one }

fiNo Gravatar January 21, 2011 at 12:05 pm

This is just the basic principle behind the concept of financial independence.

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Pat S.No Gravatar January 21, 2011 at 8:17 pm

A study came out a few years ago which revealed that, up to a certain point (75,000) per year, your level of income is roughly correlated to your happiness. Beyond that level, making more money doesn’t improve your level of satisfaction in life.
Pat
http://compoundingreturns.blogspot.com

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PatrickNo Gravatar January 21, 2011 at 8:40 pm

This reminds of an old warrant I worked for who always had a little saying when a task was due: “When you wait till the last minute to accomplish a task, it only takes a minute to do it.”

He hated receiving a task with a suspense date of a week out. He also had a very interesting email policy, he would delete every email sent to him but he wouldn’t clean out his delete folder until the end of the week. He had learned over the course of a 25 year military career that 80% of all email traffic is meaningless, and thus not worth his time. If a task was important enough then the boss would either come to him in person or send a second email. If by the end of the week neither of the those two things had happened he would empty his delete folder and go home to enjoy the weekend.

I learned a lot from this particular officer, not that it is acceptable to disobey your boss, but rather to filter for big things and not sweat the small stuff. I was amazed by how this increased my productivity by truly focusing on just the major tasks. I learned how to delegate tasks to subordinates that didn’t require my full time attention and thus spend my time on the big stuff.

This falls directly in line with my financial planning, I stopped sweating the small stuff and focused on my big expenses. Once I had identified my major expenses I was able to properly allocate funds and channel more money into savings and my investment accounts.

I would recommend that in your 100 minutes you allow time for proof reading your blogs, because a few typing mistakes may be the difference between someone following your site or deciding that if you are careless in your typing you may also be careless in your financial advice.

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RJNo Gravatar January 24, 2011 at 7:53 am

@Patrick – Great story. And yes, I’m working on the proofreading aspect of my writing. I’ve changed things up now. I started letting a post sit for 24 hours, instead of proofreading it within the 100 minutes. Hopefully, you have noticed an improvement.

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20 and EngagedNo Gravatar January 25, 2011 at 2:19 am

Basic expenses are about at $2,000/month. If I got an extra $1,000/month it’d go to eliminating debt. The next $1,000 towards an emergency fund, and the next $1,000 towards traveling. My optimal income is $5,000/month.

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CharlesNo Gravatar February 27, 2011 at 11:59 am

Interesting post, though there was a study a few years ago that said as your income goes up, there’s a slight lag in time so you’ll enjoy the new income level for a while, then you’ll realize that the *new people* you associate with earn just as much and you’ll be back to square one. I’ll try to dig up the study.

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