Spent your weekends at work? Burnt the midnight oil working on presentations? Took up extra projects to stand out in front of your boss?
“Hurray, you got a raise.”
Celebrations are definitely on the cards. You’ve worked hard for it.
I’m sure you’ve already thought of the 100 ways you’re going to spend the extra cash. Haven’t you?
Did any of it say, “Pump up your savings”?
If it didn’t, fret not. You’re not alone.
It’s only human to think of all the things you want to buy or the upgrades you want to make when you get a raise.
How much of it is necessary? Is it influenced by any external factors? Do you really need to move into a bigger house? Or buy that Gucci handbag?
An increase in income should help you get rid of your financial woes, contributing to a better tomorrow.
Watch out before you fall into the trap of Lifestyle Inflation.
Lifestyle Inflation refers to an increase in the spending pattern or expenses associated with an increase in income.
It’s not always a bad thing to increase your expenses when you get a raise. But, it is a bad thing if despite an increase in the pay check, you’re still struggling to make ends meet.
An increase in income tends to make one feel “entitled” to increased expenses and an “I deserve it” mind-set sets in. One tends to lose sight of one’s true financial needs.
Sure, you do deserve to celebrate the win and must definitely treat yourself for the achievement.
However, when the celebration creeps into your lifestyle, it can be quite contagious.
This phenomenon is more dangerous than you think and can be a silent wealth-diminisher.
Are there any smart and conscious financial habits that you can adopt to prevent yourself from becoming a lifestyle creep?
Of course, there are. Let’s see how you can fight lifestyle inflation.
- Calculate your new in-hand salary – Most often, we tend to get super excited with the % raise, failing to see what it means in terms of increase in “spendable” income. An increase in income can also push you into the next tax bracket, leading to higher tax payments. So, before hitting checkout on that luxury bag or painting the town red in that fancy new car, calculate the absolute increase in salary. This will help prevent you from falling into a debt trap.
- Get Rid of your Debts – An increase in income should help achieve your financial goals. Every person’s goal should be to be debt-free. Debts eat into your income in the form of interest. The sooner you pay off your debts, the sooner you’ll reach your net worth goals. Use the additional salary to clear off all dues and live a debt-free life. At the same time, be aware of not taking on additional, easy to access, debts to fund the new car or that Spanish Retreat.
Be Conscious to not fall into the “Buy Now, Pay Later” Trap.
- Automate your Savings – The best way to avoid overspending or carelessly using your money, is to take it out of your main bank account. Set up auto-transfer instructions for the increased amount into a Recurring Deposit or a Mutual Fund or a second Savings Account. Use the power of compounding or set aside money to pump up your Emergency Fund. Increasing the contribution towards your financial goals will increase your net worth and help you sleep better.
- Stick to a Budget – It is but natural to make upgrades with a raise or a promotion. Draw out a budget for yourself based on the increased cash flow and stick to that budget. Make gradual changes based on your goals instead of dramatically upscaling your lifestyle. Be conscious of what your actual needs are. Don’t fall into the trap of peer pressure and try not to mimic another person’s lifestyle. Surround yourself with like-minded people and don’t fall prey to “keeping-up with the Joneses”. Ask yourself if you really need to make that purchase or is it because you want to brag about it to your friends. Make conscious, mindful money decisions.
- Invest in Personal Development – Upgrade your skills or Enrol in a course that will help accelerate your career graph, increasing the probability of higher future raises. If money was a factor preventing you from exploring a side hustle, give that a try. Learning, as they say, never goes waste. Invest in yourself.
Recognise the true sources of happiness. Is it really all about money?
Will multiple trips to a fancy restaurant give you real joy? Or would a simple dine-in with friends be rather more satisfying? Will you feel an added sense of comfort by moving into a 3BHK from your current 2BHK just because you can afford the extra rent?
Real Happiness rarely comes from buying Expensive Things.
RETHINK and RE-EVALUATE the lifestyle changes that you’re looking to make based on your increased income.
Saving for an Early Retirement, Building a sizeable corpus to buy your Own Home, Having sufficient monies in your Emergency Fund.
These will give you greater satisfaction than the instant gratification that you’re trying to achieve by making smaller purchases.
Channelize the increased funds towards building your Net Worth and achieving your Financial Goals.
Don’t be a person who only looks wealthy but doesn’t actually have wealth.
And as Warren Buffet says, “If you buy things you do not need, soon you will have to sell things you need”.
But, don’t forget to treat yourself before you dive into planning what to do with the increased cash flow.
Celebrate your now and Prepare for the future.