Approximately 53% of Americans were living paycheck to paycheck before Covid. Now the figure is closer to 63%.
And that’s not just lower wage earners.
According to Market Watch, as of February 2020, “1 in 5 people making more than $100,000 a year are still living paycheck to paycheck”
That’s staggering to think about when you consider how many people are so close to a financial crisis. And how that affects their day to day. And even more surprising, is those who are making 6 figures a year can still live paycheck to paycheck. It’s obvious that it’s not just about how much money you make.
It’s all about how you manage your money and how to adjust your financial approach with each increase in income. And that’s what this blog is about.
There’s a very common phenomena that occurs when people get an increase in income. It’s known as “Lifestyle Creep.”
Cnbc.com defines it as, “the tendency to raise your standard of living and spend more once you earn more.”
Lifestyle creep causes people to lose out on the many opportunities that come with an income raise. Opportunities to elevate themselves and their family to another level of security and peace of mind. Keeping them locked in the same financial place regardless of how many raises they get.
We’d like to share with you the best practices to ensure you and your family ascend in security and comfort with each increase in income.
Here are the 7 most important steps to take when getting a raise:
1. Calculate Your New Take-Home Pay
It’s important to get a strong grasp on how much you’re actually taking home. An added $6,000 a year in your salary doesn’t mean you’re seeing the full $6,000. You’ll need to consider taxes and other deductions like health insurance or 401(k) contributions. Once you’ve established what you’re really making then you can focus on the rest of this list. We recommend waiting at least until your next paycheck that includes your raise to confirm a concrete figure of your new take-home pay.
2. Invest In Yourself
You are the common denominator in all the different aspects of your life. From finances, to relationships, to fulfillment. Everything you do is automatically capped at your current capacity to creatively and effectively come up with solutions to life’s challenges. As in everything else, in finance, your choices are only as good as your current knowledge. So we encourage you to take a course, a mastermind, or a class on something you’re interested in. Whether it be about how to better leverage your current income to reach your goals, how to get into investing, or even just better budgeting techniques. By improving the common denominator of you, you will improve everything else overall.
“An investment in knowledge pays the best interest.”
— Benjamin Franklin
3. Build Your Emergency Fund
Most financial experts recommend you have between three to six months of basic living expenses in your emergency fund. This is a powerful move because it not only provides security if anything were to happen, but it gives the added benefit of peace of mind. And with that, you are less likely to make choices that are based on fear and urgency, because you’ll have the security in knowing you can take a few months to solve any challenge that comes your way.
4. Strategically Eliminate Your Debt
There’s a proven method to eliminate debt the fastest and most cost-effective way. And it’s the title of a Washington post article, “The key to escaping from debt is to pay off the highest interest accounts first”. By paying off the highest interest accounts first, you lose less money on paying just the interest of your debts. Thus more money to put towards the principle.
5. Contribute To Your Retirement
Whether you plan to retire fully or considering semi-retiring, it’s crucial to continue adding to a retirement account, or if you haven’t got one, now’s a good time to start. There’s even a very simple way to add to your retirement without feeling like you’re losing your money now. And that’s by automating your retirement contributions, if you haven’t already. And definitely increasing your contributions once you get your raise. Make sure to refer to your new take-home pay in Step 1 before making these modifications.
6. Invest For More Wealth
You can have an emergency fund and a retirement fund – they are both ways to plan for the future to provide you with money when you need it. But what about employing your money to make you more money? Yes, there’s a learning curve, but the rewards are much greater than the cost of learning. This is indeed the proven road to great wealth and it starts with taking the first steps.
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
— Robert Kiyosaki
7. Get A Financial Advisor
The longer it takes to make a financial decision the more money you’re likely losing. That’s if a decision is even being made. Financial challenges can be quite complex and can cause us to avoid making choices altogether. And if you do make a choice, it’s benefit is dependent on if you make the correct and most effective one. It’s a boost in efficacy and confidence towards your goals when you have professional guidance. The same way you’d hire a piano teacher when learning the piano. The accumulated wisdom and knowledge of others is a sure-fire way to get to where you want to go faster. And in a fraction of the time it’d take than if you went on your own.
We hope these steps aid you on your current journey, as well as when you get your next raise.
If you feel you could use some guidance, from a team of professionals that are committed to help you manage your finances and reach your goals, then contact us here and we’d be happy to see how we can serve you and your family.