Don’t Increase Your Spending When You Have Extra Money

Jeremy Biberdorf |

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“Living Beneath Your Means”. That’s a phrase that gets thrown around a lot when personal finance blogs talk about frugality. But it applies equally to people who have attained relative financial comfort. The fact is, there are often very few life circumstances that separate the well-off person from poverty. For people with somewhat little to fall back on, it’s important to prepare for the worst in savings and spending. This might seem like common sense. So why is it so hard to follow for most of us?

Well, money has an interesting effect on the way we think. This is especially true if we’re not used to having it. A sudden or steady increase in income is often accompanied by an increase in confidence. We feel like we’re on top of the world, and that there are surely bigger and better things to come. A bright future may well be on its way. But there could just as easily be challenging times on the horizon. The only thing you can be sure of is that things will change. To prepare, it’s best to allow your lifestyle to stay the same, even as your income rises.

This provides real insulation against various worst-case scenarios. It’s important to remember that these scenarios aren’t really that unlikely. It’s entirely possible that you or a partner might lose a job, that you might have a child, that a partner or family member might unexpectedly pass away. Those are big challenges, but even comparatively minor inconveniences can take their toll on your wallet: having a car break down, watching the furnace go up in smoke, having a large veterinary bill.

So what is to be done instead? Well, there are some pretty simple steps which you’ve heard all about before. But they are always worth repeating in order to make sure you’re keeping up with your own financial life. Here’s what I recommend as preparation for the worst:

  1. Budget…and Don’t Change your Budget - Create a budget that covers the basics of your life. Eat well, but modestly, enjoy your life, but with few extravagances. Try to reserve 15% to be left over after you pay for your life and bills. If you don’t have a budget already, take a close look at what you spend in a single month. The amount will likely surprise you. By taking every dollar into account, you can start to get control of what you spend.

  2. Save and Invest - Saving and investment should become a part of your everyday life. Save when you have money, and work to save up an emergency fund that would cover your living expenses for at least six months in the event that a major financial problem strikes. Start investing if you have not already begun. Regular contributions to your IRA and/or 401(k) will have a big impact on your financial security farther down the road.

  3. Splurge, but Not Often - It’s psychologically important to give oneself an occasional reward for working hard and making money. But it’s easy for this kind of luxury spending to add up. Commit to a steady lifestyle, one not often punctuated with large, impressive purchases.

  4. Stick to the Plan - As you increase your income, increase you saving and investment, not your spending or lifestyle. Eventually, you’ll probably have built a truly resolute financial situation, one which can support an increase in lifestyle. Until then, stick to the plan and live beneath your means.

In the end, it’s pretty simple. But a lot of people mess this up by getting too excited at a pay raise or an inheritance. Just because you have more money today, doesn’t mean you’ll keep it. So keep your expectations low and your plan steady. One day, you’ll be able to afford the lifestyle you want, without the risk of overextending yourself. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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