“It is an unfortunate human failing that a full pocketbook often groans more loudly than an empty stomach.”
-Franklin Delano Roosevelt
One of the greatest threats to an increase in income is simply the passing of time. Without proper awareness and discipline, slow and steady salary increases can go virtually unnoticed, and most definitely underutilized.
Barry and Bonnie Bernstein are your typical middle-class couple. Both attended college and earned bachelor’s degrees in their respective fields of study. After college, Barry successfully landed a good job and has been slowly but surely working his way up the corporate ladder. Bonnie also landed a decent job straight out of school, and has taken on more and more responsibility, and thus has enjoyed a steadily increasing income.
The Bernstein’s are not financial experts by any stretch of the imagination, but over the years they managed to buy a nice home and save enough to go on nice vacations, purchase decent automobiles, and enjoy a stable financial existence. However, as time went by and their salaries steadily increased, those extra wages never seemed to make a noticeable impact on their savings.
Their extra money that came from regular salary increases was always absorbed by the “this and that” of life – car repairs, shopping trips, nights on the town, etc. In fact, over the course of 10 years, the Bernstein’s combined salaries increased by nearly $40,000 but they had little to show for it.
“If you would be wealthy, think of saving as well as getting.”
No change goes more unnoticed than slow, steady change. The Bernstein’s story is all to familiar. Add the American culture of spend before you earn to a lack of deliberate financial discipline, and you have a delicious recipe for false prosperity. This philosophy is sweet in the mouth, but bitter in the belly. Human nature dictates that, unless we make diligence and discipline a part of our daily financial decisions, our excess will be piddled away almost without trying.
So what’s the answer?
“My problem lies in reconciling my gross habits with my net income.”
In short, awareness and discipline are your best friends when it comes to proper money management. Below are some specific steps you can take that, if consistently utilized, will go a long way toward solving your problems.
Beware of lifestyle inflation
As always, the first step is admitting that we have a problem. As I stated above, unless you are deliberate with your money, you will most likely succumb to the pressures of culture and advertising. Carry this knowledge with you throughout each day, and consider it whenever you’re faced with a financial decision. Remember… We’re creatures of desire and, left unchecked, those desires typically get the best of us.
My wife and I fell victim to lifestyle inflation for the first four years of our marriage. It wasn’t until six months ago that we recognized the problem and worked to implement a plan to curb it.
Maintain a long-term perspective
It’s impossible to overstate the importance of setting personal financial goals. Consider trying to run a race with no idea how far away the finish line is. You can’t devise (or adjust) the proper approach without a full understanding of what your end result is.
No matter your age, income, or debt level, make sure you consider where you would like to be down the financial road. Do you want to retire early? Set your goals accordingly. Do you want to gain financial independence so you can pursue your passions without worrying about money? Set your goals accordingly.
The latter is my long-term financial goal.
Set a target savings % — not an amount, but a percentage
Instead of (or in addition to) setting a goal to save a certain amount of money over a specific time frame, you should set savings goals based on a percentage of your income. If you easily reach your target, increase it. The power of the percentage is that your savings automatically increase along with your income.
The first savings percentage goal I had was to save 5% of my income. I have successfully reached that and have since reached farther. Now my wife and I are striving to reach a 10% savings mark. Once we reach that point, we’ll increase it further. We’ll repeat this cycle until we’re saving as much of our income as possible.
Automate your savings
“Pay yourself first.” “Set it & forget it.” “You won’t miss it.”
There’s a good reason that you’ve heard these tips many times over… They work! An automated savings plan is an incredibly powerful way to help you reach your goals. Trust me, once you set up the automatic transactions, you’ll never regret it. You also won’t believe how fast your money accumulates. Combine this with the targeted percentage approach (above) and you’ll be well on your way.
My wife and I use the “Automatic Savings Plan” feature offered by ING Direct to automate our savings plan. If you’re not already a customer of ING Direct, I highly recommend them.
Work to reduce expenses as your income increases
Lastly, don’t forget to practice frugality. Frugal living will help you to reduce expenses, and reducing expenses is arguably better than getting a raise. Once you either get a raise, or successfully eliminate an expense, make sure you follow through on your financial goals by adjusting your savings goals accordingly.
I make sure I go over my income and expenses each time I review my budget. This ensures proper allocation of newly freed up monies and provides the follow through you need to successfully reach your goals!
Just do it
Don’t be like the Bernsteins! Practice these deliberate, goal-oriented financial tips to curb your lifestyle inflation and set yourself up for long-term success.