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# The 3rd Lemma of Money

Michael James wrote an interesting review about Parkinson’s Law. I commented on his site and quoted The 3rd Lemma of Money, which is one of many simple lemmas 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

It’s time to break the cycle of getting a pay raise only to end up with less income!

This simple Lemma is a very good offshoot of my Found Money Lemma.

If you are older, this is elementary proof; remember when you first started working, how little did you make? You were still able to live, but now you make 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 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).

Big Cajun Man 2010

It’s painfully true that if you know you’re about to receive a 5% pay raise, you might adjust your spending and end up with the same financial situation.

• I have decided to trade in my car, as it costs too much to maintain, even though it is already paid off.
• Your wife will replace the dishwasher as it is not fulfilling its purpose. However, you have already planned to replace it soon.
• 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 to

Have you ever experienced overspending? If not, you are in the minority, and I commend your ability to manage your finances.

## Theory of Found Money?

How to stop this? Follow The 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.

Big Cajun Man (2010)

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.

### TL:DR FAQ on Money Lemmas

What is the 3rd Lemma of Money?

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%

What is the 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.

What is the Planned Money Paradox

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).

## Feel Free to Comment

1. Another example, “gift cards”. I would think that we usually spend more than the original value of the found money.

1. Very True

2. On the subject of found money, I read somewhere a study of how much money people spend as a function of the amount of “found” money. For medium-sized amounts, people actually did spend more than they “found”.

1. I would bet that Function is exponential i n growth.

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