So you just got a new job and more money will soon be rolling in, congratulations!
This is an exciting time filled with all the new possibilities that a higher income brings. It might be time to replace an old car, buy a bigger house or take a much needed vacation. Making more money doesn’t necessarily lead to more wealth however. When more money starts rolling in, sometimes we just end up buying more stuff! This is called lifestyle inflation. Here are 6 steps to follow to help combat lifestyle inflation so you can start putting your new found earnings to work.
1) Understand how much more you will actually be making
Let’s say you are currently making $50,000 a year and you move up to making $60,000. That’s an extra $10,000 right? Not really. After taxes, this $10,000 raise becomes $6,885 ($47,998 – $41,113). Telling someone you got a $6,885 raise doesn’t quite have the same ring to it!
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2) Review your monthly cash flow
With an income of $50,000 you actually take home $3,174.14 per month after taxes and deductions (CPP, EI). With the raise to $60,000 you will now take home $3,691.47 per month. This is an increase of $517.33 which you can now use to enhance your lifestyle and build savings. If you haven’t yet, review your monthly expenditures to determine how much you are paying out. Some people might be cash flow negative (spending more than they earn) and a raise might put them into positive territory. For greater detail on cash flow, see this related post.
Related: Cash Flow – Why Is It So Important?
3) Don’t rush to make big purchases
As you’ve seen from points 1 & 2, a $10,000 raise isn’t really $10,000. If you were to go out and do a bit of shopping and buy a few new outfits or a gadget (an iPhone perhaps?) to the tune of $1,000, you’d have to work for 2 months to make back the money you spent! Why not work for a month or two in your new job and collect that extra money before going out and spending it on a celebratory impulse buy.
Related: The Cost Of Keeping Up With The iPhone
4) Pay down debt
Unfortunately, Canadians have taken on a significant amount of debt in recent years. Now that you are making more money some or all of this should be used to pay down debt. If you are servicing high interest debt like credit cards or financing plans, your new found income should be used to pay these down immediately. If you have a line of credit or owe family or friends, increase your payments by a sustainable amount. With an extra $517 per month, you could allocate another $200-$300 dollars to debt payments while still keeping a little for yourself.
Related: The Basics – Debt
5) Plan how to save some of the money
If you are debt free or have a manageable level of debt then next thing I would suggest is to start or increase your saving with a direct debit from your bank account. If you are in your 20′s and are following the 10% rule you should be putting away at least $50 more per month. If you are in your 30′s or 40′s, you should be saving much more.
6) Plan how to spend some of the money!!
Once you know how much more you are really making, have increased debt service payments and increased your savings, then it’s time for the fun part! With an extra few hundred dollars a month you can work on improving your lifestyle. This could be a new car, after school activities for children, a wardrobe update or any number of other things. People spend money on all sorts of different things so this step will be different for everyone. Try to think about what purchases would most enhance your life!
Related: The Ultimate Investment – You
Celebrate responsibly!
At the end of the day, a new job is something to be celebrated with friends and family. If your financial situation is stable, spending 10% of your raise on celebrating or something for yourself is certainly warranted.
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You had me then you lost me. I disagree strongly with the part “you could allocate another $200-$300 dollars to debt payments while still keeping a little for yourself.” You’ll never get ahead by paying someone else interest, unless maybe you’re some kind of investing superstar earning more interest than you’re paying. And I’ve never met one of those. I’m skeptical they exist. If you were surviving at the 50,000 mark, then put ALL the new money to the debts till the debts are gone. Then you can really relax and enjoy when you have not only the extra $517.33 but also whatever amount was going to pay the debts. I realize that most people don’t want to hear that, but that’s why most people are in debt, too. Anyway, it’s a great article, especially warning people about the big difference between before- and after-tax raises.
Hi Bet, you’re quite right that putting all the new money to work repaying debt is the best way to go. Personal circumstances may vary and sometimes you just want to keep a little more for yourself. I guess it comes down to how much debt you have and if any necessary purchases are coming up. Thanks for the comment!
Agreed. And a good point about “necessary purchases coming up.” I guess if you have a leaking roof, then it would be as good to put the raise towards the roof repair as towards the old debt. Probably, anyway. Thanks for making me think!