5th February 2018
According to Central Statistics Office the average salary in Ireland (2016) of a full-time employee was a ‘grocery-shop’ more than €45,000. Knowing that figure might make you feel that you’re doing well or it might make you feel like making progress on the income you are bringing in. In reality this is the main thing for many of us as we go through our careers, our own sense of value and worth can unfortunately rest squarely on the amount of money we are paid to do a job for someone else! It’s totally cock-eyed but for many people in Ireland’s society this is what they judge their success on. It’s something that I am passionate about changing over the years, I just haven’t quite figured out how yet (answers on a post-card please!).
Anyway, as ‘things’ pick up in our economy, there are more and more jobs for people to move to, more and more salary increases happening, in comparison to 2008-2013 at least! While it is not being achieved by everyone there are at any one time many people getting salary increases, be that as a result of promotion, moving to a different employer on a higher salary, or hitting targets when they had not been in the ‘rough times’.
Welcome back to another edition of the Informed Decisions Blog, Ireland’s #1 Financial Planning Blog & Podcast! This week we will explore some of the common things that people do with salary increases, and share a few ideas to ensure you don’t do the same!
Before we explore these ideas may I suggest that it’s actually the level of our outgoings that is the key figure we should focus on, as opposed to the income. For starters it is the easiest figure to impact on; it is usually easier and quicker to decrease our outgoings than it is to increase our income! That is not to sound defeatist and that we shouldn’t strive to better our position by seeking higher incomes. What I am suggesting is that we can often better our position by decreasing our outgoings in the first instance, if your household were a business you could be sure that you’d be focused on minimising the expenses….but that’s a topic for another day!
How Can I Get A Raise!?
Well that’s a great question….if you do get the answer to it make sure to pass on the answer to me!! I understand that you can do it through one or a combination of the following; negotiate really well, be really good at your job, become friends with the pay-master, move to another employer, hold them to ransom (!!), set up your own business and be really successful at selling whatever it is you are doing/making/creating!
What Might I Do With A Raise?
Interestingly, when I asked someone recently what their first thought would be if they found out they were getting a raise was….’oh lovely, what can I buy now’! When I probed a bit more she outlined that she would see a raise as a ‘gift’, almost as a windfall of some sort. For most of us when we get a raise it is deserved, it is confirmation of our value to a business. Given that it is what we are worth should we not instead treat it as our income, as perhaps even something that we should have been getting anyway……perhaps framing it as less of a ‘bonus’ and more of ‘an earned right’.
What will happen our raise if we perceived it as a ‘gift’?? Likelihood is that this monthly or weekly increase in salary will be seen as the licence to spend money on the stuff which we have been coveting for the past few years. That may any number of things, but most common examples include an expensive car, a more expensive house, more furniture, increased spending on clothes and accessories, more gadgets and technology, and any number of things personal to the person doing the spending.
In research tests using MRI machines and people making decisions about money, those who could engage a part of the brain near the left temple (dorsolateral prefrontal cortex) were much better at saying ‘no’ to the impulse and instead making more informed decisions about what they actually want. That last word ‘want’ is a key one here, is an expensive car, a bigger house, more clothes, more gadgets or whatever you’re having yourself, a want or a need? It may be a need, or it may be a temporary want. Either way it’s no harm to reflect before making the decision to determine which one it is! That ain’t easy when all the impulses flowing through you as you hover over the ‘pay now’ button online are telling you to ‘just buy the damn thing’. We all know that feeling I bet!
We all know people who will fall foul of these impulses, who 3 years after a raise will have loads of new stuff, but maybe not much else to show for it, are no happier than they were before the raise, are no more prepared financially than before the raise, and are possibly even less so on both counts.
What Should I Do With A Raise?
In fairness that too is a difficult question to answer but we’ll explore some of the options that might be worth considering.
Come Up With A Plan:
The first thing that is really really worthwhile is to invest some time figuring out what is actually important to you. What are your life goals and priorities over the next 2/5/10/20 years? This might seem a bit ‘out there’ but this is the critical step that so many people that I encounter don’t take. They do not ‘begin with the end in mind’, they see this extra money, they make rash decisions, and then they regret a lost opportunity in 5/10/20 years time from now. They essentially threw away a great opportunity to make a difference in their own lives.
Why do we do this? Well it takes effort and thought to map out those priorities. It brings to our attention that there are things we want, that maybe we will never get to, which ain’t nice to hear! We might guess that if we have a plan (Blog 40) we might be constrained in our spending, and we don’t want that! Either way it does require effort and consideration, but the benefit it can bestow on us is often life-changing
The next thing to do is to act on the plan: depending on your plan you will all kinds of priorities now and into the future…..below are some examples which might help. The worst thing you can do is to do nothing conscious with this new disposable income, because we all know that 9 times out of 10 it will just get spent every week or month on the mighty ‘stuff’!
Short Term Priorities:
You may have personal loans or credit-cards that have been a bit of a ball-and-chain, a chore for you to repay, like a lingering cold……now might be a great opportunity to blast them away with the extra monthly income you have at your disposal.
You may have a real need for a newer car, your existing one may be giving you problems, or is unsafe in some way shape or form (hopefully now!). You may indeed need new furniture or stuff for the house, you may indeed need a new telly, a new kitchen, a new gazebo for the garden….but unless you need it then I challenge you to not buy them. Buying them cannot surely be a part of anyone’s Life Plan??
Other short-term priorities might be along the lines of doing something special for someone special, a trip that you have been dreaming about doing, helping someone else in some way. It is tediously and outrageously boring but it might allow you to put in place the protection (the foundation) to protect your income now. What would your family do if you do die (Podcast 12) or you are unable to work (Blog 19) for some reason……you may decide that some of this new income would be well spent covering these events.
If there are no short term priorities then you have a decision, spend it on stuff, or put it aside until you have a genuine need or can put it toward a genuine priority you have.
Medium Term Priorities:
These 5-8 year goals can vary greatly per individual, and what life-stage they are at, and what their Plan is. An increased monthly income can be a huge plus if you are trying to save toward education for your kids (if applicable). Saving €400 per month for 8 years would accumulate a fund of over €40,000 if managed effectively. Enough the finest of educations surely!
It can be a sure-fire way of boosting your savings for a rainy-day. It can help pay for that annual holiday for the next 10 years, the holiday you have been missing. It can support you to save enough money in order to take time off in a few years.
If you are building towards something in the medium-term it is a certainty that this will require you to say ‘no’ to other impulses on that journey. Provided you are motivated enough on that medium-term goal then that usually works out fine. If you aren’t motivated to achieve it then there’s a strong possibility that you will fold before you get there….so make sure you really do want that medium-term goal!
Long Term Priorities:
Long-term goals are anything that is a long way away (what insight I hear you say!!). That might be 10 years, or it might be 30 years, depending on the goal you have in mind. There’s no 1-size-fits-all. Some possibilities:
Retire Early: If you are 40 years old now, and want to be able to retire at 60 instead of 68, you will need enough money at 60 to sustain you and yours from 60 to 68 (State Pension kicks in at 68, for most of us!). So how much would you need to sustain you for 8 years, assuming kids are grown up and independent, mortgage may be gone(?). Depending on your standard of living that may be a small-ish or big-ish amount of money.
Saving that same €400 per month into a pension (for example) might only cost you €240 after tax relief, yet amount to €160,000 (if achieve 5% net growth) by the time you get to 60 years of age……at which point you might decide to retire, and use these funds to sustain yourself for the 8 years.
We all will have our priorities in regards our Life Plan. I can’t communicate yours to you via a blog. This can only be achieved by asking some probing questions, exploring what really matters and trying to then work out what is priority.
It may turn out that you decide the most important thing in the world for you is to own that 85-inch TV, or to buy that new car every year, and that’s great, provided it is what you really do need, and not just some indulgence that may well lead to a miserable and deprived financial situation in the years to come. Nobody needs that!
Anyway, congratulations on the raise, I am sure you worked hard and truly deserve it, best thing I recommend you do now is to take some time to work out how you can make it work in your best interests.
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