April 22, 2018
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Are You Stuck in the Work and Spend Cycle?

If you’re working and earning a good salary, but unable to get ahead, you may be thinking that if you just made more money things would be different. You’d have a nice savings account to show for all your hard work. Chances are that if you got a good raise, the money would probably never find its way to any bank unless you’re really disciplined. We’ve all heard the saying “the more money you make, the more money you spend.” This statement could never be truer. Unfortunately, Americans have a negative savings rate, according to the Bureau of Economic Analysis. Earning more money won’t necessarily make you save more, or solve all your money problems. It just means you have more money to spend, which could mean you have bigger debt.

For example, imagine a family, called the Smith’s, who make $100,000 annually. They feel they have to keep up with the Jones’ so they have two car payments and a nice big mortgage payment. They also have $10,000 in credit card debt and some other loans for furniture.  A yearly vacation allows for some rest and relaxation with their kids. They’re able to pay their monthly bills, however, there isn’t much left over to save like they should. The Smith’s were fortunate to get pay raises totaling $10,000. Naturally, they were happy and talked about what to do with the extra money and decided on several things that they’ve always wanted—a bigger car, upgraded computer, digital cable, to name a few.

Unfortunately, when the numbers are scrutinized, the $10,000 doesn’t go as far as the Smith’s thought. Although they decided to contribute 6% of their paychecks to their 401(k) s, the raise is actually about $6,500 per year, or just over $500 a month, after taxes. Because of their decisions, their monthly expenses have increased by over $650, while their income only increased by $500. To top it off, the Smith’s don’t even know it because they never did the math. Unless they make some big changes, they’ll always be waiting for their next big raise that may never come. Meanwhile they work, work, work and hope they don’t get in a hole too deep.

Pay increases, gifts of money, or inheritance shouldn’t be a ticket to spend more. If you see it as an opportunity to pay off debt or save, you’ll be a lot better off. Also, if you pay off debt with your new money, but don’t change your spending behavior, you’ll end up in debt all over again.



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