Most people dream of winning the lottery. However, did you know that according to several studies, 70% of lottery winners ended up broke within 5 years of winning? Similar studies also showed that the higher the amount of winnings, the higher the probability of getting bankrupt. Most lottery winners found themselves in even worse financial situation than before they became rich. So, where did it all go wrong?
A lifestyle creep is a financial phenomenon wherein people suddenly find themselves with excess income and they are not prepared for it. They have no idea how to handle the excess money that they have. Suddenly, life seems more exciting and expensive. What used to be luxuries became necessities. Their spending increases as they begin to eat at fancy restaurants, own the latest gadgets, drive a brand new car and take more expensive vacations. The new spending habits then slowly develops into a lifestyle. It is creepy because the negative spending habits develop gradually and it is undetectable unless it is already a huge problem. Filipinos has a term for people who are victims of the lifestyle creep. We call them “Yayamanin”.
Lifestyle creep is highly contagious. You can easily be influenced by the people around you, heightened by social media brought about by FOMO.
Unfortunately, it is experienced not just by lottery winners but also by people who received retirement and inheritance money, people who had just been promoted and those people who received an increase in salary. You have seen this happen to friends and even possibly to yourself. I have seen it happen to myself. I have also seen it with the people around me.
Sadly, most people are not even aware that they are already victims of lifestyle creep.
Does it mean that you have to continue living in the same standard as you were before even with an increase in income? Well, not really.
You can make lifestyle adjustments with an increase in income but there is a limit to it.
How to know the extent of allowable adjustments in lifestyle? The key is to have a spending plan or a budgeting technique. This is the difference between the wealthy and the “yayamanins”. The wealthy set goals. They make short-term sacrifices and stick to their money management system. They practice delayed gratification and opt to put their money on investments first.
THE MONEY JAR SYSTEM
The money budgeting technique described below is actually a modified version of the Money Jar System, which was first introduced by T. Harv Eker, businessman and author of The Secrets of A Millionaire Mind. It is also an expanded version of the Abundance Formula (100=10-20-70) of best-selling author, entrepreneur and preacher Bo Sanchez.
The purpose of a budget system is for you to develop spending habits within your means and at the same time to lead you to future wealth and financial abundance.
It is called the Money Jar system because you can literally start by getting 6 jars and labeling them. In this budgeting technique, you need to divide your earned income into six (6) accounts:
1. Give Account – 10%
As soon as you receive your income, your first expense should go to this account. You probably think that this is insane. Why do you need to give when you have barely enough to cover your expenses?
The purpose of giving is to put God FIRST in your life.
You need to acknowledge the fact that your gifts and talents all came from God. Giving or tithing is your way of saying thank you to God. More blessings will come your way if you learn to share your blessings.
Do not give the excuse that you are going to start giving once your income increases. Giving is a state of mind. If you cannot let go of your Php1,000 if you are earning Php10,000, I bet, you will not be able to let go of your Php100,000 if you are already earning Php 1 million.
Why 10%? Several verses in the Bible talk about giving a tenth of your produce back to God.
Make an offering of 10%, a tithe, of all the produce which grows in your field year after year. – Deuteronomy 14:22
- Your church or spiritual community
- Your favorite charitable organisation
- A friend in need
- As presents to relatives and friends on occasions
2. Financial Freedom Account – 10%
Don’t you just want to wake up one morning wherein there is no need for you to go to work? You work only by choice and not because of necessity. Well, this account is your key. It is your investment account. It is also the most important account for the wealthy.
Financial freedom is the ability to live the lifestyle that you desire without having to work or rely on anyone else for money. – T. Harv Eker
Your financial freedom account can go to:
- Stocks, Bonds or Funds
- Business Investments
- Real Estate Investments
3. Long Term Savings Account – 10%
This account is allotted for long term spending. This fund has the most flexibility because you can use it for anything in the future just in case you need it. It is your rainy day account or your emergency fund. It plays a major role in ensuring your long term financial success. Having money available when you need it can be a life saver.
Sample usage for your Long Term Savings Account:
- Down payment for a house or a car
- Your dream vacation
- Hospital Expense
- Tuition Fee Increase
- House Repair
- Your child’s 1st birthday party
It is highly recommended that you set up a different savings account for this one. Set the account in such a way that it will be hard for you to withdraw money. For example, instead of an ATM account, open a passbook account. You can avail of an automatic save-up account being offered by banks.
4. Education Account – 10%
You are your most valuable asset. You need to invest in yourself for you to grow. The more educated you are, the more career options you have. Read books. Attend seminars. Develop your gifts and talents.
This is one of the difference between the rich and the poor. They said that poor people have big TVs while the rich have big libraries. That is because wealthy people put emphasis on continuous learning. In fact, about 88% of the wealthy read for at least 30 minutes each day for personal growth or for career development as opposed to only 2% of the poor.
Success is something that you attract, by the person you become. – Jim Rohn
5. Play Account – 10%
This will probably be your favorite account – the FUN account. It is an account to spend however you want. Use this fund to pamper yourself. Get a massage. Eat at a plush restaurant. Go to a weekend getaway. Watch a movie or a concert. Buy that latest gadget. You are allowed to shop until you blow this money away. A small indulgence can have a big psychological impact on your money morale.
So, if you want that expensive bag, sports car or luxury vacation, increase your income first until it can fit in your 10% budget.
6. Necessities Account – 50%
This account is for your everyday expenses. Included in this account are your bills, electricity, food, rent or mortgage, transportation, utilities, etc. If you cannot survive on 50%, that means you are living beyond your means. That is a clear signal that you need to simplify your lifestyle.