Step 30: Invest 50% of a payrise

Step 30 of the 100 steps mission to financial independence: Invest 50% of any pay rise
Step 30: Invest 50% of any pay rise

In step 28 we’ve looked at how to put away extra money that you might get at a certain moment in time, such as a bonus or as a gift, in order to find a balance between rewarding yourself in the moment, whilst at the same time making the most of the extra payment in the long-term by saving a part of it.

From now on, you are going to do exactly the same when you get a pay rise. In this case you should interpret “pay rise” in a broad sense and think of it of an increase in your monthly cashflow, which can come about for many different reasons. This could indeed be a higher pay from your employer, but it could also be a little side income you might be getting from doing extra work, or even a lower mortgage pay or some other favourable reduction in your expenses on a structural basis, resulting in a little extra money left over at the end of each month.

In the next step I explain the two main reasons for there never being enough money, even if tomorrow you suddenly earn twice as much as today or if you wait another 10 years and 3 promotions.. You will always spend more money with time and increased income. Changing life demands as well as lifestyle inflation cause you to spend whatever you get, unless you make wise decisions beforehand such as by always investing 50% of a raise. By allowing yourself to use 50% of an income increase and invest the other 50% of the money, instead of spending the full 100%,  you reward yourself, whilst also being able to reap the benefits of this increase in money beyond the present moment.

So you spend 50% and keep the other 50% of your pay rise (or 60% or 40% – depending on what you decide), but then what do you do with it? The title of the step talks about investing, but that doesn’t have to be investing in the stock market, it simply refers to investing in yourself and your future. This can be using it to pay off your debt, or putting it towards your savings or maybe even investing it in a side business that will generate a side income (with time… maybe?) or indeed the stock market if you want.

Let’s have a look at how much of a difference this new habit would make. For this we’ll go back to the example we used in step 20 about the power in compound interest. Here we found out that if you were able to pay $100 per month into a savings or investment account that gave you 5% interest in return, your balance after 25 years would have grown to just over $60.000. Now imagine that every 5 years you get a pay rise of $200 a month, of which you allocate 50%, so $100, into your monthly savings or investing plan. Instead of paying in $100 year after year for 25 years, you are now after year 5 suddenly able to put in $200 a month. After the first 10 years, you again get a pay increase of $200 a month, so you put in another $100 extra on top of the existing monthly payment. You continue doing this every five years until after 20 years for the last 5 years you manage to save $500 a month. How has this changed your picture?

After 25 years your account is now worth two and a half times as much as the $60.000 you get when sticking to $100 a month: you end up with $150.000, whilst you would have paid in $90.000. (note that tax increases and inflation haven’t been corrected for).

The above is just an example, and you might get more than an average of $200 per month pay increase every five years, although you might also foresee your income to go down as well with time if you are self-employed or because you want to reduce your work hours. Again the power of compound interest is at work here with ever little bit invested extra automatically resulting in a big increase over time, which is the key to bear in mind.

Step 30 – Invest 50% of a pay rise – in detail:

  • Sit down and have a quick think about how likely it is for you to get a pay rise anytime soon. When did you last get one? How often can you expect a pay rise in your industry or company? Is there anything you can do to get a payrise sooner? (renegotiate your salary, do a course, start a new business on the side).
  • Decide what you would do with any extra money, what percentage you would keep and what you get to spend and write it down so that if / when this raise comes you can just follow your plan. If you get a pay rise any time soon, you might need some extra money for some things, maybe you have a new baby or grandchild you want to budger for, or you need a new car, or maybe you really want to start putting some money aside for a holiday. Decide how much you will let yourself use for a purpose, and how much you should keep to invest in your financial future.
  • As soon as you get a pay rise, make sure to automate a payment to immediately transfer 50% of the increase into a savings account, investment account or towards paying off your debts, so you actually will stick to your plan.

Implementing this step every time and as soon as you get a raise will help you prevent lifestyle inflation at least partially, by making sure that an increase in your earnings, doesn’t automatically result in an increase in spending of the same amount, but instead ensures your money gets to be put to good use. By keeping 50% and allowing yourself to spend the remaining 50% there is a balance between short-term and long terms benefits and instant and delayed financial gratification.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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