How many of you have been toiling away earning peanuts and been struggling to save money yet after experiencing a significant pay rise are still struggling to save money? Or are you someone who has been struggling to save money even though your current income would be seen by most people as a high income?
It’s easy to find that as your income increases your expenses increase, commonly known as “lifestyle creep”. This syndrome can also give rise to the term golden handcuffs which locks people into high paying jobs to fund their lifestyle, even though they may not like these jobs or that these jobs take their toll both physically and mentally?
According to Investopedia, lifestyle creep “refers to the phenomenon where discretionary consumption increases on non-essential items as the standard of living improves.”
This could involve getting a pay rise that you choose to spend on a bigger mortgage and more expensive place to live, buying new clothes or expensive accessories, eating out more at more expensive places, taking holidays you previously couldn’t afford or even upgrading your car.
If unchecked you can find yourself in a worse financial position than when you were earning a lower income. So how can this be avoided? Below we go through 5 tips to avoid lifestyle creep when you get a significant boost to your income.
1. Set or revisit your financial goals
If you haven’t set financial goals previously then it’s time to do this. We’ve discussed financial goals in more detail previously however look to set long (greater than 12 months) and shorter term goals. Ideally these shorter goals will align with your longer term goals.
An example of a financial goal could be to save a certain amount of money for a purchase or for investing, pay down debt levels, or a long term financial independence goal.
Set goals that will challenge you, that are realistic and will take you out of your comfort zone. Also set goals that have meaning to you. If you set goals that you think you want, not something “from the heart” when the going gets tough (as it evidently will) you are less likely to stick it out if your goal doesn’t have as much meaning.
If you have already set financial goals before receiving your pay rise, review these goals and if need be made changes. In reality not a lot should change aside from increasing your savings and investment goals and possibly adding a couple of small personal expenses.
2. Set or revise your budget and stick to this
Knowing where your money goes is one of the quickest ways to help you improve your finances.
Combining a suitable budget with your financial goals should turbo charge your financial improvement.
If you haven’t already tracked your expenses and set a budget then we suggest you do this, particularly if you are struggling with your finances. If you already have a budget and you are sticking to this whilst saving money then revise this with the new influx of cash from your pay rise.
Again only a (small) portion of this pay rise should go towards any increase to your budget or expenses and ignore any impulse buys.
The rest of your pay rise should be allocated to your savings and investments. If most of your pay rise is going toward frivolous expenses then you need to have a serious review of your situation.
3. Automate your finances (if you don’t already do this)
Aligning with your updated budget and financial goals, if you haven’t already automated your finances then this is something you should look at organizing as soon as possible. The method we use is what we call our personal automated financial hub where you create a transaction account as your financial “hub” where all debits are deducted from and all income is paid into.
Once you’ve started building up regular savings (and after creating a small buffer in this hub account) your savings are automatically allocated to a specialized savings account where you can build up your emergency fund (a minimum of at least 3 months of lifestyle expenses) and eventually build up your investment portfolio.
By setting up an automated system this allows you to easily track your money and takes a lot of stress away from getting on top of your finances and once this is up and running you will only need to spend a few minutes every fortnight checking in to make sure everything is running smoothly.
4. Avoiding “Keeping Up With The Joneses”
Life is hard enough as it is without trying to keep up with friends, family or acquaintances. This could be financially or it could be in other areas such as social media.
Live your life your way and don’t compare yourself or your financial situation to others. You likely don’t know how much someone else earns, how much financial help they may receive from family members, how much they really owe or their “true” financial situation.
The only financial situation you know intimately (or at least the one you should know intimately) is yours. Control what you can control and put all focus and energy towards improving your financial situation, not projecting or wasting energy on someone or something else, something you have no control over.
Live within your means, build up your investments and your financial education and stay disciplined and you will get to where you want to be financially. One of the quickest ways to send yourself to the poor house is to try and keep up with others.
5. Increase your savings and investment allocation
The more income you (and your household) are receiving, the more you should be allocating towards savings and investments. This also includes continuing to invest in your personal financial education.
Remember the more you save and invest into high quality investments, the quicker your investments will compound and the quicker you will be able to reach your long term financial independence or retirement goals.
The bigger your investment portfolio, make sure you look to diversify this.
Getting a pay rise or a boost to your household income should be a boon for your finances, not leave you in a worse financial situation.
Yes if you are starting at a very low income point some of your increased income should go towards some lifestyle expenses however you should always be living within your means and saving/investment more than what you earn.
Sticking to the above 5 points should help you grow (or keep growing) your savings and investments with the eventual aim to be debt free with your investments/investment income replacing your current job income.