Expecting an Increase in Income? (June 2013)
An increase in income is a happy event. Whether it is from a salary increase, new job, or some other source, we enjoy celebrating when we get that first increased check or bank deposit. It is important to acknowledge and celebrate these times as it is a validation of what we have done in the past. The real test comes when the celebration is over.
It is good for people to take the extra income and go out to eat, take in a special event, or even take a weekend getaway as a personal reward. But after the food has settled, your ears have stopped ringing, or car is unpacked, it is important to have a plan for this income in the future. Without a plan the money is likely to disappear without a noticeable change in lifestyle. This is why families that make $20,000 a year and families that make $100,000 a year can both struggle with monthly finances. It is known as lifestyle creep when consumption increases as income increases. The consumption increases are spread over time and often are not realized.
Consumption creep can be avoided with a few simple steps:
- Increase investing: If you have a percentage taken out of your paycheck for investing, this is automatic. If you have a set dollar amount taken out or wish to increase your savings, changes will need to be made manually.
- Adjust your budget: If you have a budget, this is an extra opportunity to review it. Things like gas, utilities, and food go up over time, so an adjustment in the monthly budget may be in order. If you are comfortable with your current budget, add the extra income to savings or pay off debt.
- Make conscious decisions: Using the extra money for a new TV, saving for a car, or taking regular vacations are all valid goals. The choice just needs to be made purposefully. Rather than putting the TV or vacation on a credit card, or going out and getting a new car loan, start putting the "payment" into a savings account. By delaying the purchase a short time you can pay cash for the item or have a good down payment for the car. This technique (or something) will prevent you from being upside down in the car loan or having the vacation follow you home with credit card payments.
Congratulations on your increase in income. Go celebrate then get back to work. Do more than you are paid to do today, so that you will be paid more for what you do tomorrow.