When you make more money do you immediately think of new ways to spend it? This is called lifestyle creep and it can be a huge problem if you want to build wealth and stop living paycheck to paycheck. It is sad, but there are people out there who make 60,000 dollars a year with more wealth than people making 6 figures. Why, because they know how to budget and be disciplined.
As you make more money, it is very natural to spend a bit more money here and there. You have to treat yourself after all. If you are making more money year after year though and still have no savings, you have a problem. Let’s take a look at some ways that you can prevent lifestyle creep.
Work With Your Budget
When your income goes up, break it down into your separate budget categories. Do not simply consider the extra money as fun money. Take at least 20 percent of the additional income and add it to your savings budget. Then take the rest and divide it out over your other expenses. Working with your existing budget will ensure that one area of your spending does not get out of whack with your added income.
If you do not have a budget, now is the time to create one, before you start making more money. It will allow you to divide up your newfound wealth into appropriate and responsible categories a lot easier.
Choose Like Minded Friends
If your friends are all about going out and spending 200 dollars a night, luxury cars and expensive getaways, they might not be the right group to hang around with. If you hang out with spenders, you will be a spender. Try to choose friends that have a like mind and are interested in saving.
Also, be cautious around wealthier friends. Don’t feel the need to keep up with people who have more disposable income than you do.
Change Your Lifestyle Gradually
If you are fresh out of college, change your lifestyle slowly. You are used to sleeping on a futon and driving a 20 year old Honda, don’t change things too fast.
A sudden influx of income can cause a rapid change of spending habits and lead to debt. Do not get carried away until you learn to deal with your new money. Treat yourself a bit but use the bulk of your money at first to start a nice savings account and pay down your student loan debt.
Have A Goal
The sooner you start making goals, the better. You might be in your twenties but you need a plan. Sure, you have a lot of working years ahead of you but the sooner you start saving for your goal the easier it will be.
Money saved right now will have the biggest impact on your future. This is because the power of compount interest. If you save 1000 dollars when you are 20 and 1000 dollars when you are 40, the first grand you save will be worth more in the future. Why? Because it will have an extra 20 years to earn interest and even interest on that interest.
Make Fun Part Of Your Budget
A budget is not just about being responsible, paying bills and saving for the future. You should also have a set amount of money set aside for fun.
You can take this set amount of money and use it as you like, guilt free. Make it a percentage of your income and as your income goes up, increase it proportionally.
Make Debt A Priority
If you get into the right mindset, paying down debt becomes addictive. As your income increases, take a higher percentage of your disposable money and put it towards paying off your loans. An increasing salary is a golden opportunity to pay off high interest loans like credit cards and student loans.
Credit card debt should be a priority but after that, you need to tackle student loan debt. Although some would consider it good debt, if you are paying interest, there is nothing good about it.
Plan For Success
What will you do with extra money if you get a raise? Plan for it now so that you will be ready when it happens. Daydream about those big purchases early and then come back to earth and plan on some responsible ways to use your new money in the future.
If you wait until the extra money is in your account to make a plan, you might just be in trouble.
You have to treat yourself from time to time to stay sane. All work and no play will make you resent that budget. If you get a raise or a nice bonus, take a portion of it and buy yourself something as a treat. Just do not blow all of the money and you can spend without guilt.
If your pay goes up 1000 dollars a month, take 400 dollars and treat yourself with your first new paycheck. That will give you a nice treat that you can use to motivate yourself to save most of your money going forward.
Tina’s Final Word
Making extra money is a wonderful thing but it ultimately does you no good if you spend every dollar of it. Set a budget, stick to it and fit pay increases responsibly into it. Whenever possible try to not live within your means but below them. It is the best way to build wealth. so that you have money for tomorrow.