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.