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In April, we launched a new series in celebration of Financial Literacy Month that aims to promote financial inclusion and literacy by explaining some of the most popular jargon within the financial community.
And now, to celebrate the upcoming Financial Awareness Day on the 14th of August, in Part Four we’re covering some of the most talked about concepts in finance: lifestyle creep, the “24-hour rule”, and the “50/30/20” golden rule when it comes to budgeting.
1) “Lifestyle Creep"
Official definition:
Noun: also known as lifestyle inflation, a phenomenon that occurs when more resources are spent towards the standard of living and former luxuries become perceived necessities.
Our definition:
Lifestyle creep is what happens when your spending increases along with your income.
Let’s say you landed a promotion at work at the beginning of the year and along with this, a pay rise. As a consequence of this additional income, you’ve been able to spend more on trips, days out, and clothing, and you may have also treated yourself to a fancier car with more expensive monthly payments or moved to a new home with an even bigger mortgage.
The downside of this is that you may continue living paycheck to paycheck despite the increase in income, leaving you in the same financial position as you were before the pay rise. Another potential consequence of lifestyle creep is that when income decreases e.g. losing your job or in retirement, you’ll run out of savings quickly as you continue to live beyond your means.
Read more:
2) The “50/30/20” Method
Official definition:
Noun: a rule that simplifies budgeting by dividing your after-tax income into three spending categories: needs, wants, and savings or debts. -n26.com
Our definition:
The 50/30/20 rule is a simplified budgeting method that is great for budgeting beginners or those looking for a simple way to budget their finances.
With this method, you’ll divide your monthly income into 3 clear areas:
50% of your income for needs (e.g. fixed or variable expenses like mortgage/rent, groceries, utility bills, car insurance)
30% for wants (e.g. your non-essentials like days out, subscriptions, restaurants, or holidays)
20% on savings (for rainy days, an emergency fund, retirement or investments for the future).
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3) The “24 Hour Rule”
Official definition:
Noun: a strategy used by those trying to save money where they give themselves a 24-hour block of time to consider whether they should make a purchase, and whether it is a need or a want. -TD Bank
Our definition:
The 24-hour rule is a common practice amongst those trying to refrain from impulse spending and involves waiting at least 24 hours before making any type of purchase on an item you want to buy.
Instead of simply telling yourself you can’t spend the money, you take the time to pause and assess whether you actually want that thing. Usually, after the initial 24 hours have passed, you may reconsider the purchase and decide you don’t need or want it as much as you originally thought - helping you save money in the long run.
Some people also take this a step further by giving themselves a ‘48-hour rule’ or even going as long as a week before making the purchase!
Read more:
Whether you've just embarked on your journey towards better finances or consider yourself an expert, it's never too late to learn something new. Regardless of where you are on your financial journey, we hope this series provides some valuable information and inspires you to learn more!
What money jargon would you like to see us break down next?
Join the conversation over on our Instagram and stay tuned for Part Five coming soon!
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