You’ve finally been promoted and received a fabulous raise. Your immediate reaction may well be to rush out and upgrade your car, move into a bigger house or take your kids on holiday. To make a long-term financial impact on your life, seize the opportunity by deciding on the best way to make the most of the extra income you will soon be earning. While most of us have aspirations we are working towards, and we certainly deserve to reward ourselves for progressing in our careers – it may be worth taking a step back to evaluate what the new salary means in practical terms. It may also be worth revisiting your short-, medium- and long-terms goals to ensure that any additional spending is in alignment with those.
Lifestyle creep, according to Investopedia, is when “an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities. A hallmark of lifestyle creep is a change in thinking and behaviour that sees spending on nonessential items as a right, not a choice.”
If you’ve recently been promoted, here’s Hancox advice to avoid the pitfalls of lifestyle creep:
1. Understand your package
It is imperative that you understand exactly what your new package includes and excludes. Be sure what your take home salary will be before making any hasty commitments. Often, the HR team at your office should be able to assist with this.
2. If you need to strengthen your financial position, this may be your chance
It may be worth evaluating whether your circumstances require you to use the money to place you in a stronger financial position. You may opt to put the additional income towards settling expensive debt or creating an emergency fund, retirement contributions or specific savings goals. That way, the money’s not accessible for you to spend, you don’t get used to having extra income for nice-to-haves, and you’re one step closer to financial peace of mind. Hancox says, “When I got promoted, I chose not to get used to the increase for everyday spending, but rather to use it in a way that I knew would serve my family and I well in the long term.
3. Get to grips with the trade-offs
The extra money from a promotion means you have the chance to make good choices for you and your family. But do you put more towards your child’s education or buy a house? Do you go on an amazing family holiday or retire a year earlier? Do you make lifestyle sacrifices now so you can reap the benefits later in life? A financial planner can assist you in deciding on goals and create a plan to make them happen.
4. Adjust your retirement saving, if possible
If you’re not already doing so, you should aim to put at least 15% of your income towards retirement. This is just a reference amount and will need to be tailored to your individual circumstance, but it’s a good yardstick. As your salary increases, so too should your retirement fund contributions. Hancox recalls the discipline it had taken to make that conscious decision to consistently increase her retirement savings each time she was promoted. “I do allow myself the occasional spoil, but I always try to consider the comfort and lifestyle of the ‘future Lee’ to make sure I’m doing her justice too.”
5. Make conscious decisions to slow the creep
If possible, keep your expenses the same, and set goals and milestones for bigger purchases. You should also continue shopping mindfully. Buy trendy, affordable antique furniture over new items. Make every dinner a ‘Masterchef Mystery Box’ occasion – online sites like Supercook show you recipes you can make with the current contents in your fridge. Stop the impromptu shop on the way home. Continue to pack lunch rather than buying it at the nearest coffee shop. Skip the second latte even though it’s now easier to afford it.
6. Understand the behavioural psychology behind your spending habits
Much of your attitude towards money is shaped during childhood. Try to understand the factors behind your money personality. Having these insights will make you more conscious of your decision-making. Additionally, appreciate how important it is to share financial education with your children from an early age. “When I grew up, we didn’t have the luxury of buying impulsively so that helped me to remain level-minded with my own finances as an adult”, says Hancox. “It could have gone either way, though!”
7. Spend more, owe more
When you earn more, often the temptation is to spend more, which ultimately leads to owing more. You might be about to pay off the bond on your current home, but the temptation may be to take out a new 20-year bond on a bigger, ‘better’ property. You can end up trapping yourself in terms of living in a certain way. If you keep ‘upgrading’, you keep having to pay off increasing debts, which means you’ll probably need to work for longer and potentially have less to retire with. Of course, you may have your reasons – perhaps there is better capital appreciation in that area, or you have a family who is outgrowing the current home – just as long as you know what the short and long term implications are, and you’re making an informed decision.
8. Discuss the promotion or bonus with your partner
Very often couples think about money differently. If you’re a saver and your partner’s a spender, for example, and he or she is already planning the upgrade of the family car with your increase, while you want to pay off the bond, this may cause a bit of friction. It may be worth having the discussion upfront.
9. Enjoy the money and realise some creep is okay
Speak to a financial adviser to understand what’s viable from a lifestyle creep perspective, especially if a promotion comes with a big payday. Think through every decision. If you go from a Fiat to a ‘Merc’, you’re going to have pricier tyres and increased fuel expenses to contend with, as well as a potentially more expensive maintenance plan. If you buy a bigger house, don’t forget the rise in rates as well as maintenance costs.
Hancox concludes, “You need to celebrate the hard work and effort that led to your promotion. A professional financial planner can assist you in putting a plan in place that helps you do just that. And if the lifestyle creep has already set in, it’s never too late to turn things around. Your financial planner can help you set realistic goals for the future.”