Why do some people achieve financial independence while others struggle financially, even when they earn significantly more?
It’s a question many financial advisers encounter regularly. Surprisingly, the answer often has less to do with income and more to do with behaviour and spending habits.
Two powerful concepts in personal finance help explain this pattern: the Hedonic Treadmill and Parkinson’s Law.
Understanding these ideas can help you avoid common money traps and build wealth more effectively.
The Hedonic Treadmill: Why More Money Doesn’t Always Mean More Wealth
The Hedonic Treadmill refers to our natural tendency to quickly adapt to improved financial circumstances.
When income increases, our expectations and lifestyle tend to increase as well. Instead of saving or investing the extra income, many people simply upgrade their lifestyle:
- A bigger house
- A newer car
- More frequent holidays
- Higher everyday spending
While these changes may bring short-term satisfaction, they rarely create lasting financial security. Over time, the higher spending simply becomes the new normal.
Parkinson’s Law: Why Expenses Always Seem to Grow
Another principle that explains this behaviour is Parkinson’s Law, which in personal finance is often summarised as:
“Expenses rise to meet income.”
In other words, the more money people earn, the more they tend to spend.
Without a clear financial plan, increased income rarely leads to increased wealth.
A Real-Life Example
I once spoke with a client who had been paying $2,000 per month on her mortgage for many years. She never missed a payment and managed to live comfortably while doing so.
Two years ago, she finally paid off her mortgage.
Logically, you might expect that after 24 months without that $2,000 monthly payment, she would have saved around $48,000.
However, when I asked about it, the money wasn’t in her bank account, and she couldn’t clearly identify where it had gone.
What happened?
Her lifestyle had simply expanded to absorb the extra cash.
This is a perfect example of the Hedonic Treadmill and Parkinson’s Law in action.
Eventually, she decided to take out another loan and invest in an investment property, which helped redirect that surplus cash into an asset.
Financial Independence Starts With a Plan
Achieving financial independence rarely happens by accident.
More often, it comes down to planning, budgeting, and building assets over time.
As the saying goes:
We don’t plan to fail, we simply fail to plan.
Of course, budgeting is easier said than done. If it were easy, everyone would already be financially secure.
The “Clayton’s Budget”: A Budget Without Budgeting
For people who struggle with traditional budgeting, there is a simpler approach.
I call it the Clayton’s Budget, the budget you have without actually creating a budget.
The idea is straightforward:
- Borrow to purchase an investment property (within sensible lending limits).
- Let the mortgage repayments become your forced savings plan.
- Build your lifestyle around the income remaining after those repayments.
Over time, your lifestyle naturally adjusts to the cash flow that remains.
Interestingly, many people discover they don’t actually miss the extra spending they once thought was essential.
Why This Strategy Can Work
Banks are in the risk management business.
Before approving a loan, lenders carefully assess your income, expenses, and ability to repay. In many cases, mortgage repayments are designed to stay within a manageable range, often around one-third of income.
Because of this, the loan amount approved is typically within a range considered financially sustainable.
If repayments ever feel tight, it often means lifestyle spending needs adjusting, rather than the loan itself being unrealistic.
A Strategy for the Next Generation
The Clayton’s Budget can be especially helpful for younger people who find saving difficult.
By committing to regular loan repayments first, they effectively create a system of forced savings. Instead of spending any extra income, the repayments go toward building assets.
Over time, this approach can lead to significant wealth accumulation, particularly when combined with the power of compound interest.
Compound interest allows your money to generate earnings, and those earnings then generate their own returns. As this cycle continues, wealth can grow at an accelerating rate over the long term.
This is why compound interest is often linked to a famous quote attributed to Albert Einstein:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
The Bottom Line
Becoming financially independent doesn’t always require extreme discipline or complicated financial strategies.
Sometimes, it simply comes down to structuring your finances in a way that prioritises asset building before lifestyle spending.
Avoid the traps of the Hedonic Treadmill and Parkinson’s Law, and instead create systems that help you build wealth automatically.
Over time, small financial decisions can lead to big long-term results.
Considering Property as Your Next Step?
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Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
