After a raise, beware of lifestyle change that eats up potential savings

In early April, Kelsey Cruz did what many are doing in this time of low unemployment and high demand for talent, she left a job she loved for one that promised new challenges and better pay.

In her new role, the 26-year-old Torontonian has managed to get a $40,000-a-year pay raise, but Cruz still worries about overspending that her lifestyle could increase with her salary, especially with inflation so high.

“I feel like a lot of my friends and people I hang out with are in a similar place in life. They all do fine on their own, so sometimes there’s a sense of trying to keep up with them, and it can be expensive,” he said.

Cindy Marques, co-founder and CEO of MakeCents, a financial advisory company for millennials, said she often sees a lifestyle shift, a phenomenon in which discretionary spending on non-essential items seems to increase along with someone’s salary, with clients who are stuck in a paycheck-to-paycheck cycle. Even after getting a raise or a new job with a higher salary, they continue to live from paycheck to paycheck.

“Unknowingly, they slowly end up adjusting their spending agreement to the money they have available. They end up using it all without really improving their financial situation,” Marques said.

Lifestyle change can also happen with self-employed people with sporadic income, Marques said. Whether they’re having a good month or a tight month, any extra profit ends up being spent.

Cruz said he has already seen his spending increase. Since the new job, he has been spending those extra earnings on daily Starbucks runs, going to bars and restaurants more, and taking Uber rides without hesitation.

“There are so many monthly expenses that are so unnecessary, but because I’ve been making more money, I’ve justified to myself that it’s okay because I can afford it and because I have a ‘I deserve it’ mentality when it comes to spending money.”

Fighting the lifestyle change comes down to keeping track of your spending, Marques said. Most problems occur when you are not aware of how money is going in and out of your account.

“Subconsciously, we just end up adjusting our own spending based on what we see is available in our checking account,” he said. “Nothing really feels different.”

Instead, those who receive a raise must create a plan for the extra money they will earn. If it’s not related to covering the costs of inflation, Marques recommends that Canadians set up automatic savings contributions to use some or all of those additional funds to increase their net worth.

Marques said she does this with her own income so “future Cindy” can benefit from her savings, which she calls her liberty fund.

“The way I say it is, allow yourself to spend more because you’re earning more, but also allow yourself to spend that money in the future,” he said.

For those wondering if they should use the extra money to improve their lifestyle, Marques said to look at it on a case-by-case basis.

For example, if you’ve been dreaming of renting a bigger apartment during the pandemic but always felt financially out of reach, a raise would be a good time to consider allocating more money for a move.

However, if you’re sporadically thinking about things to buy that you didn’t necessarily need before, it’s better to resist the urge than to make a purchase right away, he said.

In Cruz’s case, she’s still finding the right balance between saving and enjoying the rewards of her hard work.

“With the new job, I had to review my finances and create a new budget to make sure I’m saving more, but I’ve also put more money into entertainment and personal care services like nails and hair.”

This report from The Canadian Press was first published on May 10, 2022.

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