Translating an Increase in Income to an Increase in Savings

For many people working around the world today, an increase in pay doesn’t necessarily translate into an increase in savings for emergencies or retirement.

mastermind-traders-increase-income-increase-savingsIf you asked the 1 in 3 workers in America who haven’t saved any amount of money for retirement WHY this is the case, you’ll likely hear several variations of the same answer. I can’t afford it. I don’t make enough money. I’m living paycheck to paycheck just paying my monthly bills.

Pushing a little further with this group, you’ll see a disturbing trend. Even as their income grows, their ability to save still eludes them. A lot of times, an increase in salary leads to spending more money.

You may have experienced this phenomenon. Perhaps you accepted your first professional position right out of college, and the annual salary was $30,000.

$30,000! That is all the money in the world! All you’ll ever need and more! What a thrill!

But you make a fatal mistake right off the bat, and set up a life that requires most of that money. You rent an apartment and buy clothes and expensive groceries, and go out to dinner most nights and buy drinks on the weekends. You travel. You buy nice gifts for people. You spend what you make, and maybe a little bit more (enter credit cards).

Life is good! You have lots of things, and you pay all of your bills on time.

The Slippery Slope

Now flash forward 5 years. You’re 30, and now you’re making $50,000. Wahoo! $50,000 is more than you’ve ever made! What a world! But here’s where we start down a dangerous road.

Instead of spending the same amount that you were spending when you made $30,000, and saving the additional $20,000, you set your sights on a nicer life. You buy a house and a new car. You travel more and buy nicer clothing. Your spending goes up, and all of a sudden you’re back where you started, without enough extra to save.

Is that because you can’t afford it? Is it because you don’t make enough money?

Well, NO. You can’t save because you have created a life that requires all of your money. You haven’t paid yourself, and as time goes by, this only gets harder. Once you’re used to buying everything you want, living without a budget and stopping only when you see that your bank account balance has reached an uncomfortable low… these habits get hard to break.

So here’s a different strategy to employ when you get your first raise (and your second and third and fourth).

Step 1. Find some gratitude for the extra cash. Instead of feeling like you always need more, figure out how to feel really grateful for what you already have. Look at your bank balance several times per week, or even everyday, and get excited about the fact that you have money in there.

Step 2.  KEEP LIVING THE SAME LIFE, with some flexibility. Don’t automatically increase your overhead because more money is coming in. This is where your budget comes in, because if you don’t have a good grasp on how much you’re bringing in and how much you need to live each month, you can’t really make good decisions about where to allocate NEW funds.

Make a budget, account for a few splurges here and there, and then make room for an emergency and retirement fund.

Step 3. Stop pretending that you don’t have enough money to save for your future. You have it, it’s just a matter of reigning in the spending and reallocating funds to your future self. Truly, no one else is going to do this for you. And the sooner you get it started, the more time your money will have to grow.

Do it now! Don’t wait for another raise. Make a plan and start building your future.