What to do When You Get a Pay Raise

Pretend Like you got Demoted

Ben Le Fort
Sep 9, 2018 · 4 min read
“two man doing shake hands” by rawpixel on Unsplash

“The time to repair the roof is when the sun is shining.”- John F. Kennedy

Your boss calls you into his office to let you know that you have received a 5% pay raise. Congratulations take a minute to enjoy the moment and the recognition of all your hard work over the past year.

Now for a critically important question, what are you going to do with that extra 5%?

The answer to that question will reveal everything you need to know about your mindset towards money. If you decide that you are going to take that extra money and upgrade to organic bananas or dedicate a little extra money to eating out or switching from the $10 to the $12 bottle of wine you will never build real wealth and reach Financial Independence.

If you feel the need to upgrade your life every time you upgrade your income, you’re on the wealth building treadmill. In the Financial Independence community, we call that lifestyle inflation and it’s what keeps high-income earners from ever becoming financially independent. It’s a recipe for you to need to keep working into your 60’s or 70's.

It can be tempting (and understandable) to say to yourself “I worked damn hard to get to where I am, I deserve some of the finer things in life”. I’m not here to tell you that you don’t deserve the finer things in life because you absolutely do. I’m here to ask you to think and I mean really think hard about what “the finer things in life” are? A new sports car is a fine thing but is it as fine as owning your house 5 years sooner? Or putting your kid through college or retiring years earlier than you ever thought possible?

Be a human and really think about what makes life worthwhile (to me it’s more time with people I love) and then think like an economist and devise the most efficient way to get that thing that makes life worthwhile for you.

If the feeling you get when you are revving the engine of your brand-new Mustang fills you with excitement and really makes you feel like you are living your best life, go for it. But be honest with yourself, what are the chances that 6-months after you buy that Mustang that the initial thrill will wear off and it won’t bring you any more happiness than your old dented Toyota?

Ok, Enough with the Lectures, on to the Point of the Article.

Here is the first thing I do when I get a 5% pay raise, I sit down with my wife, we throw out our budget and start a new budget working under the (false) assumption that I actually received a 5% reduction in pay. Rather than spending that extra 5%, do the opposite, find a way to reduce your spendings by 5% and invest the difference.

As a hypothetical, let’s say your take-home pay (what’s left after taxes and other deductions) is $3,000 and you have budgeted $2,500 for spending with $500 towards saving/investing. This puts you at about a 17% savings rate, which means, according to Mr. Money Moustache, you will hit Financial Independence in about 40 years.

You get your 5% raise and that brings your net income to $3,150 which you have dedicated to saving. Now the part that requires not only restraint but a little bit of sacrifice. Cut your spending by 5%, so that you have $2 ,375 budgeted for spending leaving you with $775 to save/invest. This puts you at a 25% savings rate and 32 years to Financial Independence.

Cutting Back When TImes are Good Can Supercharge your Path to FI

This is incredibly powerful, you have taken a modest 5% increase in pay and with a little sacrifice knocked 8 years off your time to Financial Independence/Retirement! If you repeat this (or at least hold your spendings steady) for a few years the math of Financial Independence will be working in your favor. Before you know it, you’ll have complete financial freedom. In my opinion, that’s much better than switching to organic bananas.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions

Making of a Millionaire

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Ben Le Fort

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Sharing my journey to financial independence. For freelance inquiries reach me at benlefort1988@gmail.com

Making of a Millionaire

Publishing Stories on all things related to personal finance