1. Be Conscious of Lifestyle Inflation
When my husband transitioned to his post-college career and started making more money, I felt like we deserved to buy nice things because we had worked hard and gone without during our university years. Of course, this attitude led to overspending.
While we were making significantly more, our bank accounts looked just like they did before the career change. It wasn’t until we became conscious of lifestyle inflation that we reined in our spending and thought seriously about how to handle the extra cash. There’s a lot to be said for reminding yourself that a raise or bump in salary isn’t just “fun” money. If you spend it too fast, it won’t feel like much of a raise at all.
2. Calculate Real Changes to Budget
After taxes and expenses, the effect of a raise is often less significant than you first think. Take the time to calculate the real change to your budget and determine how that extra money is going to affect you.
If your boss offers a $12,000 annual raise, that works out to $1,000 more per month. Subtract roughly $400 per month for taxes, depending on your total salary, and your “huge” raise is now an extra $600 per month. It’s nothing to sneeze at, but it’s not exactly a huge bump in lifestyle either.
Calculating the real and final amount that lands in your bank account each month can provide a healthy dose of perspective. Once you’ve done the math, you might find that your raise doesn’t exactly merit a new car or shopping spree.
3. Value Experiences Over Things
If you start making more money, feel free to spend a little bit to improve your lifestyle. However, instead of going for a new car, house, or expensive wardrobe additions, consider investing in experiences. Going on a vacation or signing up for a class can create memories that give you a lasting satisfaction, making you less likely to keep spending. Contrast that to shopping for new clothes, which produces a short-lived high that needs to be replicated.
Talk to your family about your new personal budget and why you prefer not to spend that extra cash on “things.” Chances are, when you suggest fun experiences as the alternative, they’re going to be on board.
Feeling jealous about money and keeping up with the Joneses is part of human nature. Because you want to prove that you can afford the same things as your friends, you spend more than you want to – especially when you’ve gotten a bump in salary. That’s why it pays to spend time with friends who have similar lifestyles and budgets as you.
For example, consider a night out: If your friends live an inflated lifestyle, you might be enticed to go to a pricier restaurant, order expensive drinks, or even pick up the tab. If your friends live more modestly, on the other hand, and you match your behavior to theirs, you’re likely to spend less.
A 2012 Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics found that the “rich” – those who make more than $150,000 per year – spend 5.4% of their income on food and 5.7% on entertainment. The “poor” – those making less than $20,000 per year – spend a little less: 4.7% and 4.8%, respectively. While that might not seem like a huge difference, percentage-wise, it means a rich person could be spending $8,100 on restaurants compared to a poor person’s $940. Hanging out with someone who has a vastly different budget than your own could result in pressure to spend more.
The same could be said for cars, houses, and other possessions. If you think your friends are more successful than you, you might feel the urge to push your budget to the max in order to keep up. Instead, friends with similar financial goals aren’t going to pressure you into an expensive restaurant or make you feel bad about your older-model car.