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WHY YOUR EXPENSES GROWS TO FOLLOW INCOME

13 Apr

You must have realized that no matter how hard u try to save by reducing ‘expenses’ and increasing income, things hardly work out your way. That is very normal,

Whenever income increases, expenses are likely to  increase proportionately, that is what we call in economics the marginal propensity to consume (MPC), which basically means increase in personal consumer spending in relation to increase in disposal income, on every one extra shilling earned a particular portion will be spent, most likely higher, than will be saved.

Basically this sublimes into a principle called the Ratchet effect

Ratchet effect
A tendency for a variable to be influenced by its own largest previous value. For example, consumption from any given income may be higher, the higher the previous peak income. The ratchet effect implies that variables are more sticky in one direction than the other. For example when given a salary increament of kes 10,000.00 your expenses are likely to go up by Kes 8,000.00 leaving only kes 2,000.00 as Saving. Meaning your MPS marginal propensity to save is %change in exp/%chage in income

=2000/10000=0.2%

Expenses reduction techniques that work.

  1. Learn and shop smart
  2. Minimize transactional costs
  3. Utilize bulk discounts
  4. Budget for your money

All this notwithstanding try to increase your income through doing part time job that pays, start a small scale business, change jobs.

Having enough for yourself and family is not about reducing expenses it about increasing your income.

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2 Comments

Posted by on April 13, 2011 in Economical, Financial, Lifestyle

 

Tags: , , ,

2 responses to “WHY YOUR EXPENSES GROWS TO FOLLOW INCOME

  1. whesongerwealth

    July 19, 2011 at 5:35 am

    @ronald knowledge is only useful if shared…… that is why our great inventors are still revered up to date .

     
  2. ronald

    April 14, 2011 at 4:58 am

    kwani hizi vitu zote wewe alianza lini.
    good advise keep it up

     

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