René Basson, Head of Brand at Satrix

Have you fallen prey to Parkinson’s Law? When it comes to finances, this law refers to lifestyle inflation; the phenomenon of individuals increasing their spending as their income rises. Avoiding or beating lifestyle creep allows for more income to be invested in one’s financial future, offering greater potential for financial stability.

René Basson, Head of Brand at Satrix, says, “Frequently, your expenditure rises as you earn more, which means there is an opportunity cost of the additional income you could have invested to earn greater, compounding returns. It is important to celebrate one’s accomplishments and reward oneself for hard work and dedication. However, there is a compelling case to be made for striking a balance between immediate gratification and consideration of your financial future.

“By maintaining a longer-term perspective and making mindful decisions, you can reward yourself, while investing in your future self.”

Understanding Parkinson’s Law

Parkinson’s Law was first formulated in The Economist by C Northcote Parkinson in 1955. In his essay, the naval historian posits a few concepts in relation to work. This article will focus on the observation that “the demand upon a resource tends to expand to match the supply of the resource (if the price is zero).”  Like a goldfish growing to the size of the pond it is in, you typically spend more as you earn more. Basson adds, “The reality is that lifestyle inflation can affect everyone. It can be one of the biggest contributing factors to how people fail to build wealth.”

How to Actively Challenge Parkinson’s Law

Basson shares practical ways to combat lifestyle creep:

1. Create a Budget

• When establishing your budget, take the time to consider and develop each aspect thoroughly. Be realistic about your income, assess your expenses thoroughly, and identify attainable savings goals.
• To stick to your budget effectively, it is important to track your spending regularly to ensure that you are staying within your financial limits. Monitor and manage – make the necessary tweaks to cut down where you can.

2. Pay Yourself First

• Set up automatic transfers to your savings and investment accounts. This ensures that a portion of your income is consistently saved before you have the chance to spend it.
• Increase the amount you save as your income grows.

3. Prioritise Financial Goals

• Define short-, medium-, and long-term financial goals, such as paying off debt, saving for a home, or investing for retirement.
• Regularly review and adjust your goals to stay on track.

4. Limit Lifestyle Upgrades

• Avoid the temptation to upgrade your lifestyle with each pay raise. Instead, maintain your current standard of living and allocate extra income towards savings and investments when you can.
• Be mindful of the impact of small, incremental lifestyle upgrades, as they can add up over time.

5. Practice Mindful Spending

• Before making a purchase, ask yourself if it aligns with your financial goals and if it is a need or a want.
• Delay gratification by waiting a few days before making significant purchases to ensure they are necessary and not impulsive.

6. Reduce Unnecessary Expenses

• Identify and cut back on non-essential expenses, such as dining out, subscriptions, or luxury items.
• Look for ways to save on regular expenses, like cooking at home or shopping sales.

7. Surround Yourself with Like-Minded People

• Spend time with people who share similar financial goals and values. They can provide support and motivation to stay on track.
• Avoid social comparisons that might pressure you to increase your spending to keep up with others.

8. Seek Professional Advice

• Consider consulting with a financial adviser to create a personalised financial plan and receive guidance on managing your money effectively.
• A professional can provide valuable insights and strategies to help you avoid lifestyle creep and achieve your financial goals.

“The trick is balance and being mindful about your finances,” says Basson. She adds, “There are differing guidelines on how much of your income you should spend, save, or invest. It varies from 50% for living expenses to 30% for discretionary spending like lifestyle and entertainment, and 20% for saving and debt, such as your credit cards, savings, and investments. Be honest with yourself and be realistic; it depends on personal circumstances.”

Having a budget in place is crucial for managing finances effectively. Analyse it regularly to account for changes in circumstances and life stage. Developing a routine of saving and investing, even with a modest monthly contribution, can reinforce good financial habits.

Reach Financial Prosperity

Limit lifestyle creep by considering how hard the extra money could work for you if you invested it. Basson adds, “By diversifying your investment portfolio, you can leverage your enhanced income and harness the power of compounding interest to amplify your wealth accumulation over time. Set up a monthly recurring investment and increase it as your income rises – based on what you can afford.”

• Consider a Tax-Free Savings Account to capitalise on the tax benefit; opt for a diversified portfolio across asset classes.
• Consider exchange-traded funds (ETFs) or index-tracking unit trusts that track various indices. They can offer higher liquidity and lower net fees.

Basson adds, “Consider going for a goals-based investing approach. Set granular short-, medium-, and long-term goals to work towards to stay on track and avoid the temptation of lifestyle inflation.”

ENDS