How to manage expenditure when income increases
The author of ‘Practical Steps to
Financial Freedom and Independence,’ Mr. Usiere Uko, in this report writes about
how you can overcome the impulse of increasing your expenditure when your income
goes up.
Tony works in one of the big four telecoms
companies and lives in his Uncle’s boy’s quarters in Lekki Phase I. His Uncle
does not charge him rent and he takes his meals at the main house. The boy’s
quarters was fully furnished before Tony moved in. Apart from his clothes, toys
and the Range Rover parked beside the boy’s quarters, Tony has little else to
his name. A third child and only son in a family of five, Tony is the richest
among his siblings. His parents had returned to the village upon retirement
years back, leaving Tony with his senior sisters with the responsibility of
seeing the remaining ones through school.
Fresh from youth service, Tony first moved in
with his Uncle after he got a job in an eatery in Lekki Phase I through his
Uncle’s connections. He later got a job in a bank before finally crossing over
to the telecom company. One thing has remained constant since Tony got his first
job. He is always broke and owing; hence he could not contribute to the sisters’
education or send money to his parents in the village. He always had one excuse
or the other. As he changed jobs, the situation remained the same. His sisters
are the ones paying the school fees of their siblings in school and sending
money to their parents in the village. None of his sisters earn up to half his
salary, though they live on their own. Tony is always broke. It had become a
family joke.
Murphy’s Law of Expenditure
Tony is operating under the Murphy’s Law of
expenditure which states that:
Expenditure will always grow to meet income.
This means as your income increases, your
expenditure catches up. You return to your financial comfort zone, the place you
are used to, which for many is being broke.
There is a way we instinctively act anytime money
comes into our hands. If you think back each to time money gets into your hands,
you will notice a pattern. Your money reflex kicks in. You do what you normally
do with money and end up how you normally end up – usually where Murphy’s Law
said you would. For Tony it is with an empty wallet and increased debt.
Increasing your expenditure when your income goes
up is due to inability to delay gratification. We want to enjoy life now by
acquiring things that we think will make life easier and make us feel happier.
Consequently, as our income rises, we are better able to pander to our wants
list; hence the truism in Murphy’s Law. Wanting better things is not wrong in
itself. Life is supposed to get better and more fun. The challenge is doing the
right thing at the wrong time, spending in the season for saving and
investment.
Increase your savings as income goes
up
If we want to move ahead financially, we have to
break Murphy’s Law over our finances so that we can have money work for us. That
means we have to fix our expenditure and increase our savings when our income
goes up. Prices of things do not go up in the market when you get a pay
increase, promotion or bonus. The market does not know, hence your expenditure
should not go up when your income goes up; rather your savings and investment
should go up. Your expenditure should go up by reason of inflation, not pay
raise. How do you achieve this?
The best way to escape the pull of Murphy’s Law
of expenditure is to switch our mindset from – spend first and save what is left
(often nothing) – to save first and spending what is left. It means cultivating
the habit of paying yourself first. When you cultivate the discipline of saving
first and sticking to a fixed recurrent expenditure, you have escaped the
gravitational pull of Murphy’s Law of expenditure. More money now translates to
moving faster towards your financial goals.
Derive pleasure from saving
Shopping makes us happy. As children, we loved
new toys and were forever pestering our parents to buy us things. Anytime a
visitor gave us money, the first thing that came to mind was what to buy. This
habit has been carried over into adulthood and taken to a whole new level. If
you feel bored or down, go to the mall and let retail therapy work its magic on
you. Hence spending makes us happy while saving is boring and painful (being
deprived of instant gratification), so we gravitate towards spending. We
naturally seek pleasure and avoid pain hence we love to spend and procrastinate
on saving. We give our money away instinctively. Therefore the idea of our
savings growing month by month does not fascinate us. We believe the future will
take care of itself – just enjoy the moment.
We can turn it around. We can link pain to
shopping and pleasure to saving. When you meditate on how much money has passed
through your hands in the past five to ten years with precious little to show
for it, it makes you angry, especially if you are trapped in a job you hate.
When you think about what you could have do with that money – your sweat and
blood – if you dwell on it long enough, you will start to feel different about
giving your money away just like that. When you start to see your money as
potential employees capable of working long and hard for you come rain or shine
24/7 public holidays inclusive, you want to invest more, even in fixed deposits
or treasury bills if you have no idea what else to do.
Focus on your financial goals
When you set clear financial goals and focus on
achieving them, you find it easier to delay gratification and save towards your
goal. When you have a goal, nothing motivates like making steady progress
towards that goal. If you put money aside from your salary every month, your
pile grows each month. You look towards each pay day with anticipation because
your portfolio is going to grow yet again. If you are investing, it means the
returns are going up each month. No paid job comes with a pay hike each month,
but that is what happens when you add to your portfolio each month.
As you practise delayed gratification, it becomes
a habit. You start to prioritize your financial goals above spending,
accumulating stuff that will eventually end up in the trash. More pay speeds up
the process, moving you faster towards financial independence, where your
monthly returns grows to cover your monthly expenses thereby giving you the
power of choice. Powered by the magic of compound interest, you begin to gather
momentum and acceleration towards your financial goals.
When you get to this place, you have escaped
Murphy’s Law of expenditure. Your savings grow to meet your income rather than
your expenditure. You are now in control of your finances and fully back in the
game.
culled from Punch
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