Michael James wrote an interesting review about Parkinson’s Law yesterday and I commented on his site quoting C8j’s 3rd Lemma of Money which is one of many simple Lemma’s I have about how money and finances work (one day I will publish the entire list).
This simple Lemma states:
Any increase in income (e.g. Pay Raise) will then cause a 115% increase in spending in reaction to that increase so that after a short period (no more than 6 months), effective income will have dropped by 15%Lifestyle Creep
Simple idea isn’t it? How many times have you been pining to get a pay raise, and then when you get it you actually end up with less income at the end of it? If you are being honest, pretty much every single time.
This simple Lemma is actually a very good offshoot of my Found Money Lemma as well.
If you are older this is a very simple proof, remember when you first started working how little you made? You were still able to live, but now you make what 4 or 8 times what you made when you first graduated, yet you are farther in debt, how is that possible?
The explanation is simple, we fall for the C8j’s Planned Money Paradox, which is the following:
Whenever new money arrives, the items and expenditures that it is planned to be used for is no less than 125% of the actual found money (with no upper limit on the actual amount spent).
Again, a simple observation, which is painfully true. If you know you are about to receive a 5% pay raise, the following could easily happen:
- You plan to trade your car in because, your current car is just costing too much to run (even though it is paid off).
- Your wife plans to replace the dishwasher because it is just not doing the job, and you were planning on replacing it soon anyhow
- Since you got this great raise you plan on taking a nice vacation, because you deserve it
- To celebrate you take your wife out for dinner
- Your kids always wanted horse riding lessons, so you figure you can afford that now too
- Etc., etc., etc.,
Never happened to you? If it has not, you are in the minority, and I applaud your ability to control your spending.
Theory of Found Money ?
How to stop this? Follow C8j’s 1st Theory of Found Money:
Found money cannot be spent for at least 6 months after it arrives, and no planning around the use of this money can start until 3 months after it arrives.
This Theory does not guarantee a good use of this found money, however, it will at least allow you to attempt to create a found Financial Plan around this new found money.