By BOB CUNNINGHAM
One of the more common mistakes that folks make regarding personal finance, especially you younger adults, is to believe that getting a raise at work should equate to raising your standard of living.
The smart money managers don’t think that way.
The common mindset for those who simply haven’t yet fully embraced the idea of getting ahead financially, rather than merely keeping up, is to dedicate those extra dollars into new and improved personal benefits… a more spacious crib (I’m so street), a nicer ride, new clothes, or whatever… rather than the simple step of increasing the amount you save every month.
Worse, many still aren’t saving yet and are spending all (or more) of their income, whether it increases or not.
Now please, don’t get me wrong. If you earn a substantial raise at work (or even a modest one), there’s nothing wrong with a little celebration – going out to a nice dinner, or maybe a splurge on a new outfit not available at Ross Dress For Less. You probably worked hard to earn that pay increase, and you should feel fine about enjoying the fruits of your labor… to a point.
If, however, you’re the type who figures out that your monthly take-home just went up by $75, and you’re trying to determine which additional expense you can afford, that you couldn’t before, you’ll never really get ahead monetarily.
If you’ve been paying attention to this blog for any length of time, you will know that I am not a proponent of the live-below-your-means philosophy, but I only feel that way in that I believe saving should not be considered part of the means formula.
To clarify, I’m saying that savings should come off the very top (remember, always “pay yourself first,”), before your means is determined. If you do that, then it’s fine to live right up to your means, provided you don’t go over it by running up debt or doing something else ill-advised.
Of course, a common response to this is “that sounds all well and good, Bob, but I don’t have any money to spare. I’m barely getting by.” It’s the most common refrain by a wide margin – people simply refuse to believe there’s anything in their current routine that they can go without, but when I press them about how often they eat out (including fast food), shop for goodies on-line, have coffee at the local coffeehouse, or go to the movies, their answers inevitably range from “occasionally,” to “well, a person has to live.”
Sure they do. But when you eat fast food, can you focus on the joint’s budget menu rather than get the $8 No. 1 combo? Couldn’t you simply spend less time thinking of crap you want to buy at Amazon or Overstock.com? Can you settle on a Tall rather than a Venti? Might you go see a flick during the daytime and pay matinee prices?
And then they get a raise, and they start eating out more, frequenting Starbucks twice as often, add E-Bay to their binge shopping, and see movies they liked a second time, under the premise that “I can afford it. I just got a raise.”
How about, instead, increasing your savings… and potentially knocking several years off your working life that can be added to your retired life? I don’t know about you, but why in the heck would anyone work until they’re 65, when the ability to retire 10-15 years sooner (or even earlier) is available? They like their work? Great… they should put themselves in a position to dictate EXACTLY how much they do, how often, for whom, etc. by making income a non-factor.
To summarize, you don’t have to go without basic needs and a few wants in order to be smart with your money. But if you’re not saving something every month without questioning it – preferably, at least 10 percent of your take-home pay – and committing it before you pay any of your expenses, you’re missing the financial boat.
If your tendency is toward spending instead of saving, you have a decision to make. Have a little more fun now. Or, with the amazing power of compound interest, have a lot more fun later… both in quality and increased number of years you can worry about playing instead of working.
Then, your next raise won’t matter. Thanks for reading.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.