One of the worst things that you can do, is to get caught up in a lifestyle adjustment – in which your standard of living increases simultaneously with the rise of your income: The trap of earning more only to pay others more. Let me explain.
Promotions and raises in income have the tendency to bring about new spending and costs, as most people adjust their lifestyle for the better. Financial institutions will increase your credit limit and give you a bigger debt coffin to lie in.
You'll start justifying why a bigger residence, top-of-the-range car and the newest mobile device is a must. People need to see that you have risen and arrived. You can "afford" it now, so what's the problem?
Well, before you start levelling up, there are a couple of things that you should consider.
Have you built up an adequate emergency fund - enough to cover at least three to six months of your living expenses? Life can bring some unpredictable expenses, from a car breakdown to paying insurance excess and repairing or replacing your mobile device.
Have you amped up your retirement contribution? Many workers will retire before they expect to – and before they are ready – while life expectancy in South Africa continues to rise. Remember that the longer you live, the more money you will need.
Don't get stuck in the trap of earning more to pay more. Wise up!
Have you paid off all your old debt? There's an interest rate attached that will grow what you owe.
Have you started investing and accumulating income-generating assets? Assets that will pay you back through dividends or rental income?
These are important things to consider before adjusting your lifestyle, and I've realised that it's a lot easier to save money I've never had than it is to save money by cutting my expenses. Pay raises, promotions and bonuses can make saving a lot easier. For the past four years, when I've received a raise or additional income streams, I've ignored them.
I've been living off the same salary I earned in April 2016, and I only adjust my lifestyle every two years. In between that time, I've used my extra money to build up an emergency savings account, pay off debts and invest in shares and ETFs via Easy Equities.
I still drive the same vehicle, use the same cellphone and reside at the same place. April is approaching, and I'm due for an adjustment as a way to splurge and reward myself. I will be doing it because it's within my financial means, and I've spent 24 months planning.
I'll be the first to admit that there is more to life than simply saving and investing. We work hard and deserve all the nice things. However, it's important to also show some financial discipline and plan purchases.
Otherwise you will be digging a deeper debt grave and not be building any wealth, but all the while earning a bigger salary. That doesn't make any sense. Don't get stuck in the trap of earning more to pay more. Wise up!