As far as money is concerned, the most important natural law I have observed is what I have named the law of gaseousity. Along with rule of 72 (which does not come from my observation but from Benjamin Franklin), it is one of the most important principles of financial management.

The law of gaseousity can be expressed thusly:

Money, like gas, fills all available space.

It actually is not because of some mysterious physical properties of money. No, it is a property of the human mind. Hence, this is a psychological law, not an economic law, though economists are quite aware of its existence and validity (of course, they don't call it the law of gaseousity—that is my own name).

Now, let me expand on it a bit.

The average, ordinary, person makes a certain amount of money every month. It does not matter whether it comes from running a business, from having a job, from Social Security, from welfare, or from any other source.

That same average, ordinary person is always broke in one way or another. Whether the income is $300/month or $12,000/month, whether it is in dollars or any other currency, the typical person has certain needs and wants, and will spend that money. Some will spend it all virtually immediately (especially those whose income is low and all they can afford is food and shelter), others will take longer (i.e., save up on vacation, for Christmas, etc, and spend it seasonally).

People adjust to their level of income. Whenever most people get a raise, they are left with same amount of money after the same period of time (that is, with nothing) as before. (How else do you explain that a football star who makes, say $6 million/year, has nothing left when he can no longer play?)

When people have to take a cut, they also cut their spending, and, again are left with nothing (well, beside frustration, of course, but I mean nothing in their wallet.

I am not suggesting that I have discovered anything new and earth-shaking here, even if all of this is based on my personal experience and on observing other people.

The IRS in the US, and the corresponding tax collectors in other countries certainly know about it. That is why taxes are deducted from your paycheck. You never even see that money (unless too much is deducted and you get some of it back once a year). If you did receive that money, you would spend it and would be unable to pay taxes at the end of the year. But since you never see it, it does not fill your available space, and you never miss it (I'm using the word you in a generic sense: some people would be able to save it up and pay their taxes once a year, but they would be an exception).

So why is all this so important? Because understanding the law of gaseousity of money is a key to becoming rich and independent.

I have already explained in another node (click here to read it) how to make money grow, and become rich, over a period of time. The problem most people have is that they never have any money to grow.

The solution is to do to yourself the same thing the IRS does. If possible, arrange with your employer to have some money deducted directly from your paycheck and have it sent to your mutual fund or whatever investment vehicle you are using. Most mutual funds will be happy to accept a direct deposit and invest it according to your specifications.

Alas, not all employers are willing to do that. In that case, arrange for your mutual fund (or whatever vehicle you are using) to take a specified amount from your checking account once a month automatically.

Finally, if even that arrangement is not available to you (it is, if you live in the US, it may or may not be elsewhere), then get to the absolute habit of taking a predetermined amount of money on a predetermined day of every month and invest it in a predetermined investment vehicle. All the predetermination is necessary for it to become a habit, so you pay into your investment the same way you pay your electric bill, your phone bill, etc.

Use the third method (making monthly payments only if the first two are unavailable. Use the second method (deduction from the checking account) only if the first method (deduction from your paycheck) is not available. But absolutely positively use one of them.

It is important to treat your investment vehicle as something distinct from yourself. As if you were giving the money away. Otherwise, you may be tempted to take it back out and spend it. Naturally, after you have achieved your investment goal (such as retirement, or being filthy rich, or whatever) may you take the money out and start spending (but only a predetermined amount, so the rest keeps growing). That is not to say you cannot change investment vehicles at different stages of your life, only that you cannot spend the money invested.

Doing this will effectively feel the same way as if you got a pay cut. Because of the law of gaseousity of money, you probably not even notice the change. Or you may have to do just minor adjustments. Once you have fully adjusted (so you don't even think about missing that money anymore), consider increasing the amount of your monthly investment. Not drastically, only to the point that you can adjust to again. Try increasing the amount regularly, say every six months or so.

Please note that everybody can do this. When, for example, I was a child growing up in Communist Czechoslovakia, I certainly could not invest in mutual funds, but I had a passbook and saved regularly. The amount I put in was minimal from an adult's viewpoint. But it got me into the habit. And when I lost my job decades later and was collecting unemployment compensation, I went with a mutual fund that accepted $25/month, but I was still doing it. Now that I am working again, I switched to a better mutual fund, of course.

By the way, the interest on my child's passbook was only 2%, which is negligible. But that was irrelevant. Because I kept adding to it on a regular basis, the amount kept growing, and I could afford things I could not have afforded otherwise.

See also: