Receiving a pay rise marks a financial milestone of an employee’s life. However, a pay rise can also come with it’s own financial challenge and problem.Sometimes it’s very tempting to spend the additional money down the drain by celebrating, rising the lifestyle standard, or even get into debt. At the other side, this pay rise can also being used to accelerate your wealth building growth. This article explores actionable steps to ensure your pay rise leads to lasting financial security rather than temporary gratification.
1. Understand Lifestyle Inflation
Lifestyle inflation, also known as lifestyle creep, occurs with the rise of lifestyle standard following the increase of paycheck. While it might seem natural to reward yourself with a more luxurious lifestyle, this habit can actually ruin the savings rate which is the way to build financial security and wealth. This habit can also ruin your life when you receive a paycut, because it’s very hard to give away lifestyle that you’re already comfortable with, and a paycut might render somebody to debt or even illegal moves to satisfy that same lifestyle he/she has before the paycut.
To combat lifestyle inflation, be mindful of your spending patterns. Always ask yourself “do I need to have this rise of spending? Or can I just invest my additional income to build my financial security?” That way you can discipline yourself from unnecessary spending and increase your savings rate that can be used to build wealth and ensure financial security.
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2. Allocate Your Raise Wisely
A pay rise offers an excellent opportunity to enhance your financial health. Instead of spending all of your new income, consider the following strategies:
- Clear Out Debt: Being debt free is the starting point towards financial freedom, by being debt free we basically can’t be bankrupt which is a disaster in financial journey. Clearing out payments like personal debt, student loan, car debt (if you’re already into one, never get into one in the first place) or mortgages is the first think you should do when receiving paychecks. The quicker you clear your debt, the sooner you can start your wealth building journey.
- Increase Your Emergency Fund: Allocate a percentage of your raise to account purposed specifically for emergency fund. This account ensure your financial security when something unexpected happen like accident, layoff, or other things might coming your way. The general rule of thumb for this is 6-12 times of monthly expenses, but in current world when finding job or starting business is more difficult than ever, it is wise to bulk up your emergency fund to more than that.
- Invest for the Future: The way somebody can build wealth overtime is to invest in asssets that generates cashflow or appreciation in value and then reinvest the gain to build compounding effect. Always think about increase the investment when receiving the payrise to speed up the process and make the return greater. The instrument can be anything like real estate, Sharia compliant stocks, sukuk, or anything else that you understand.
3. Review and Adjust Your Budget
When you receive a pay rise, it’s essential to revisit and adjust your budget accordingly. A higher income allows for more flexibility, but it’s still important to maintain control over your finances.
- Prioritize the right thing: Prioritize the right thing is the key to a successful budgeting. By prioritizing the right thing we can set up the pathway to financial health. Prioritize debt clearing first, investment second, and lifestyle upgrade third will be the wise way to rebudget after pay rise.
- Track Your Expenses: Use budgeting apps or spreadsheets to track how your spending changes after your raise. This is the way to keep yourself discipline from letting the lifestyle inflation to creep in into your spending.
Maintaining a clear and updated budget ensures that your additional income is being utilized effectively and in alignment with your financial goals.
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4. Celebrate Responsibly
Like a good diet and exercise needs a cheat meal and rest once in the while, keeping your financial discipline also sometimes need some sort of break to keep yourself motivated. By still financially conscious of the budget restrain, having some form of self reward after a payrise is a great way to keep your financial motivation going. “Enjoy your money” phrase is applicable in this case.
For example:
- Instead of going on a luxurious vacation, have a good cheap tailgating or camping
- Instead of buying crazy expensive dinner at fine dining restaurant, have a generious fulfilling meal at a great local spot
Celebrating responsibly helps you enjoy your success while staying on track financially.
5. Remind Yourself of Your Long Term Financial Goal
Almost every person has their own financial goals to aim for. Whether it means retire early and living out of passive income or starting your own business and have freedom over your time, Your pay rise can serve as a stepping stone toward long-term financial goals. Aligning your pay rise with meaningful goals can provide motivation and purpose, ensuring your additional income is used productively.
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Conclusion
A pay rise is more than just extra money; it’s an opportunity to speed up the journey towards financial freedom. By avoiding lifestyle inflation, managing debt, and focusing on savings and investments, you can turn a pay increase into lasting financial security. Remember, financial success is not just about how much you earn, but how wisely you manage what you have.
References
Clever Girl Finance. (n.d.). What Is Lifestyle Inflation? How To Avoid It. https://www.clevergirlfinance.com/lifestyle-inflation/
Savology. (n.d.). Savings Rate: What Is It and Why Is It Important?. https://savology.com/savings-rate-what-is-it-and-why-is-it-important
Investopedia. (n.d.). Simple Steps to Building Wealth. https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/
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