How to turn a raise or bonus into lasting wealth

  • HENRY is an acronym for “person who earns a lot, is not yet rich”, a term for those affected by the slow lifestyle.
  • When you get a raise and you don’t have a plan for it, you easily spend that money.
  • Financial planners recommend having a plan for each increase and not letting your expenses skyrocket.
  • Read more Personal Finance Insider stories.

From the time I was 16 until I graduated from college at 22, I worked various part-time, hourly jobs, mostly minimum wage. I am forever grateful for this time in my life because I truly believe it helped shape my financial habits and taught me how to budget, save, and plan.

But a few months ago, I started my first full-time salaried job and was overwhelmed with the new amount of money I was bringing home. While my salary is not lavish, it is certainly more than I have ever earned before.

Slowly, I’ve been tempted to spend money on things I never would have considered before, things like food delivery and cute apartment decor that I always thought were luxuries and not necessities.

While I’ve been pretty good at keeping up with my financial goals, the temptation to spend more as I earn more is real. And I’m certainly not the first person to experience this desire. Lifestyle change, also known as lifestyle inflation, is a phenomenon defined as “an increase in spending when an individual’s income increases.” “It’s a very common thing,” says Brittney Castro, a financial planner at the Mint.

Understanding the dangers of lifestyle inflation

Without an awareness of lifestyle inflation, it can leave even extremely high-income earners struggling with debt, saving for retirement, or meeting other financial goals and obligations. “The negative ramifications of lifestyle change may not show up until you’re in your 40s or 50s and start thinking about retirement,” Gideon Drucker, financial planner at Drucker Wealth Management and author of “How to Avoid HENRY Syndrome “. he says. HENRY stands for “person who earns a lot, is not yet rich”, a common description of those who have fallen victim to a slow lifestyle.

Drucker explains that there are many people who come to him later in life with high incomes, sometimes more than a million a year, without corresponding 401(k), investment portfolios or other assets. “If you just looked at his income, you would have said, ‘Where did all the money go?'” he says. “Over the years, all of his expenses piled up: the vacation home, the cars, everything, one after another.”

But it’s not just people with high incomes who can fall into the slow lifestyle trap, it can happen to anyone whose income increases over time. Although I am early in my career, I began to wonder if there are tangible ways to avoid lifestyle inflation so that I don’t fall into the hole I could already feel myself inching toward.

Planning for an increase or increase in income

“We are all going to spend our money if there is no plan for it,” explains Castro. That’s why it’s essential to have a plan for your new income even before you start receiving it.

If you expect a raise, Castro says it’s important to review your budget and goals before it goes into effect. “Think before that raise hits my account, where could you send it? Why don’t you redirect it?” She suggests using the increase to contribute to savings, retirement or investment goals rather than directly to your checking account.

Create habits while you’re young

According to Drucker, one of the best defenses against lifestyle change is developing good saving and investing habits in young people. “When you get into that habit, even if it’s in smaller dollars, when the numbers start to go up, it will feel normal and natural,” she says. “Even with small amounts of money, you start adding more [to retirement, savings goals, investment account] slowly over time, you don’t notice it as much.

Paying yourself first is essential

Instead of saving what’s left over at the end of the month, it’s important to save as soon as your paycheck hits your account; automating this process makes it even easier. This is known as “paying yourself first.”

By getting used to having only a certain amount of income, the temptation to spend more and save less disappears.

“I would say that people who are economically successful tend to redirect any increase in income and continue to live on a very specific number,” explains Castro.

While that doesn’t necessarily mean you’ll never be able to enjoy the benefits of a raise or higher salary, it goes back to the point of planning for your biggest income and having that money automatically go toward various financial and savings goals.

Without a plan, “you’ll find a reason to spend those extra dollars,” says Drucker.

How to enjoy an increase in income

When you make more money, it’s natural to want to reward yourself for the hard work it took to get there. “It’s always about striking a balance,” says Drucker, stressing the importance of a financial plan that takes into account things you want to do and buy, not just necessities.

“Say you get a 4% raise, maybe you decide to take 1% of that and just spend it,” Castro explains, offering a simple way to incorporate your new income into fun spending without going overboard.

While not a required formula by any means, thinking about your raise in this way allows you to consciously outline how your new income can fit into your life.

Lifestyle Creep Correction

If you’ve run into a lifestyle problem, both financial planners advise going back to the basics of budgeting and planning. “Look at the numbers, look at what you can cut, set a budget and then follow through — it’s really the only way,” says Castro.

“It’s having that honest conversation,” says Drucker. “What are your expenses? How much do you really spend per month and how much are necessities?” After fully analyzing his financial situation, he can begin to put together a plan that will help correct the problems that lifestyle can create.

As Castro says: “This is why financial planning is so important, because you can earn a good amount of money, the difficult part is that it still takes discipline to save.”

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