Michael James wrote an interesting review about Parkinson’s Law. I commented on his site and quoted The 3rd Lemma of Money, 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 significant 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
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%
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.
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).
Another example, “gift cards”. I would think that we usually spend more than the original value of the found money.
Very True
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”.
I would bet that Function is exponential i n growth.