It was an offer I didn’t expect – an offer, as Marlon Brando would say, that I couldn’t refuse, not that I would have wanted to anyway. By the time the phone call was over, I had accepted a promotion that would bring tens of thousands of more dollars into my household every year; it virtually tripled my weekly income overnight.
It also begged the question – just because you get a raise, should you also revise your budget?
Battling Your Instincts
I will admit – the first thing I did when I got off the phone (other than call my husband, my mom, my dad, and our old nanny – I needed to rehire her for a few days a week) was to take my kids out for a celebratory ice cream cone. My next instinct was to finally buy myself a new purse, since my old one was easily five years old and falling apart. And then there was the matter of the beautiful J. Crew wool coat I’d been eying… the list could have gone on (and on, and on).
Fortunately, I stopped – after the ice cream, of course – and thought about it. Because of my penchant for being frugal cheap, my family has lived on a relatively bare bones budget ever since I decided to leave my full-time job in TV almost two and a half years ago. Every single expense – from monthly budget standards like gasoline and groceries to luxuries like vacation and new clothes – had to be meticulously penciled in. There was no wiggle room, no time for spontaneous expenditures.We got used to living that way and, to be honest, it never felt all that painful, as budgeting sometimes does. We knew what came in, we knew what came out, and we committed to save – and leave untouched – whatever was left.
Some Sobering Statistics
The fact is, Americans seem programmed to spend what they have, leaving little left for savings or investments. A survey by the American Payroll Association found that more than two-thirds of Americans – 68 percent – live paycheck to paycheck. An August article by Megan Korn at Yahoo! Finance reported that 75 percent of Americans approaching retirement had $30,000 or less tucked away for their golden years. Leaving below ones means is as foreign to Americans as turning off their iPhones before bedtime or using public transportation; some do it, but most don’t.
Just How Much It Pays To Save
Before I started shopping online for designer jeans and booking a romantic getaway to the mountains for me and my husband, I spent some quality time with Dave Ramsey’s investment calculator. I wanted to run the numbers to see just how much of a payoff I could expect if we saved all or part of my new salary:
- Staying on our current monthly budget, and putting all the additional money I’d be making – $2000 a month – into investments for the next five years; assumes 6% ROI. After 60 months of contributions, I’d have invested a total of $120,000. If we left that money untouched until age 65 – 35 years from now – it would have grown into $844,592, just shy of $725,000 of which would be interest.
- Slightly inflating our budget, and putting only half of the additional money I’d be making – $1000 a month – into investments for the next five years; assumes 6% ROI. The original $60,000 in contributions would grow into $422,000 by the time I reached 65 years old.
- Staying on our current monthly budget, and putting all the additional money I’d be making – $2000 a month – into investments for the next five years; assumes 8% ROI.Say the stock market picks up again, and instead of a modest 6% return on investment over the next 35 years, I got an 8% return instead – I’d see my $120,000 in contributions blossom into $1,617,760. How’s that or a nest egg?
After running these scenarios, it became clear that I couldn’t let my raise lead to unnecessary lifestyle inflation. So I cancelled the celebratory dinner reservations at the swanky new infusion restaurant in town and started plotting how much of this money we’d save.
Reader, how do you combat lifestyle inflation? Do you find it harder to fight the more money you bring in?