In a time of inflation and economic uncertainty, it’s important to focus on the positives — not only to give hope, but also to motivate us and our commitment to the grind as well. New survey results from consulting firm Pearl Meyer found the average annual salary increase has reached 4.8%, the highest in decades. Additionally, many companies are expecting even more pay raises for the second half of this year.
The reason for the increase in pay raises? Organizations and businesses want to retain their employees through uncertain times. A post by LHH on hiring trends includes tying higher pay to performance, where employers can get top value by paying top dollar. In addition to salary raise, deferred pay or a bonus system have been found to boost employee productivity. As raises and increased earnings become more common, it’s important for us to know how to manage this extra income well. Today, we’ll go over a few tips to help with that:
Allow funds for fun
This could be everyone’s favorite financial advice — which we’ve already mentioned in our previous AskTheMoneyCoach post on common budgeting mistakes. When thinking of how to budget a sudden increase in income, it’s important to allow yourself funds to have fun and indulge in things that bring you pleasure. Think of it as a well-deserved reward for all your hard work, and a means to keep your work-life balance in order. Just remember that as with all things, it’s important to do this step in moderation.
As a rule of thumb, set a budget or monthly allowance for one or two pleasure items each month, so that you can treat yourself on top of accomplishing your other financial responsibilities (savings, emergency funds, bills, and so on) without feeling deprived.
Avoid lifestyle creep
When you suddenly have access to more money, it can be hard to notice the “lifestyle creep” — or “lifestyle inflation” — in which the cost of your lifestyle somehow balloons up to match that of your now higher income. This NPR feature on the concept cites the shift from batch-cooking dinner to getting sushi delivered, for example, or a sudden increase in frequency of online shopping.
While rewarding and treating yourself once in a while is understandable, it’s important to make sure that just as your income increases, so should your savings. Everything else — like the little lifestyle upgrades you’ve wanted — can follow in time. Another step you can take to avoid falling victim to lifestyle creep is making a list of things you want to buy and waiting a predetermined amount of time (like a week or a month) to buy it. This way, you avoid impulse purchases and the hidden charges that may come with them — like impulsively buying a car without thinking of gas and maintenance costs down the line, for instance.
Use the opportunity to pay off your debts
We’ve discussed treating yourself and knowing when not to over-treat yourself. Another advantage of earning more than you previously did is that you have more money to pay off debts and loans because of the extra income. While this may seem like a bleak financial chore, think of it as an investment that will save you future costs in interests and mental burden. From credit card debts to student loans, setting aside some money from your increased income will help you settle them as early as you can, so that the rest of your future earnings can go to other priorities.
This Washington Post writeup on paying off mortgages faster highlights being able to save up to thousands in interest by paying it off early. These extra few thousands can go towards tackling other debts, or be put into other ventures for passive income. It can be overwhelming to pay off debts, but doing it as early as possible will simply save you from future headaches, and a well-deserved pay raise can greatly help with that.