I'm Still Living on My 2011 Salary - and You Should, Too

Congratulations on your raise or bonus. Now, forget you got it.

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dollars and coins
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A friend recently got a promotion that pushed up his salary by $500 a month. I asked him what he was going to do with that new money. He had previously been complaining about balancing his family's monthly budget even with the extra new income.

My friend replied that he'd just bought car, and the payment was around the same amount as his raise. I couldn't believe it. If you were struggling to balance your budget, why would you increase your lifestyle with a raise? My advice to him (and to you) about such a raise would be this: Pretend that you never got it.

For the past several years, each time I've received a raise, I've ignored it. I've been living off the same salary that I earned three years ago. The extra money from the raise I received in 2011, I've been putting into a savings account. My job also provides me with a cost of living increase each January, typically 1 percent to 2 percent. So in February, I raise my 401(k) retirement contributions by the same amount.

A Raise or Bonus Is Found Money

A raise is found money. It's money that you haven't included in your family's monthly budget. That makes it the perfect money to build your savings or boost your retirement investments.

"Unless you've been struggling to live on your current pay, or feel like you've been sacrificing a lot to do it, I love the idea of just pretending you didn't get a raise or bonus and instead adding it to your savings," says Scott Halliwell, a certified financial planner with USAA. "Put your raise to better use by saving it or paying off debt with it rather than just expanding your lifestyle with it."

The best thing to do after you pay off a car loan is to continue making payments like you never received the title. But instead of making payments to the bank, you make them to yourself. That's the easiest way to watch your savings grow. And the same is true of a pay raise. Route it straight into your savings account or retirement fund, and continue living off your previous salary.

Oh the Places a Raise Could Go

If you don't have an adequate emergency fund saved -- enough to cover at least three to six months of your family's living expenses -- you should make correcting that the first task for your new income.

You should also consider adding your raise to what you contribute to your Roth Individual Retirement Account or 401(k) retirement plan. If you are younger than 50 and are under the income limits, you can invest $5,500 in a Roth IRA and another $5,500 if you're married. If you're older than 60, you can contribute an extra $1,000 in a Roth IRA as a catch up contribution.

Finally, you can never go wrong paying off old debt with a new raise. Even though you will only be paying off a little more each month instead of a large lump sum, you can save a fortune in interest payments -- painlessly. And paying off a credit card that charges you 18 percent annually is equivalent to earning 18 percent on an investment.

"It's usually a lot easier to save money you've never had than it is to save money by cutting back in other areas," says Halliwell. "Raises and bonuses can make saving a lot easier."

Don't Get Caught Up In Lifestyle Creep

One of the worst things that you can do is getting caught up in lifestyle creep, where your standard of living increases with the rise of your family's income.

We often find ourselves getting carried away and spending more than we earn even after earning a new raise. Raises and promotions have the tendency to bring about new spending. My friend experienced lifestyle creep first-hand and is in trouble with a budget that still won't balance. He earned more money and tried to justify a new car payment.

Workers who's paychecks are supplemented by commissions (which may vary widely) can feel the effects of lifestyle creep more than those of paid strictly by the hour or the week. It's doubly wise to set aside a salary boost or one-time bonus when you work on commission.

"There's a psychological benefit," says Holly Perez, consumer money expert at Intuit and Mint.com. "As long as you don't spend more than your base salary, you can be confident that your lifestyle is sustainable without having to worry about cutting costs if you get a smaller-than-usual commission check. Plus, you get the satisfaction of having more money in the bank."

Should You Splurge a Little?

Of course there is more to life than simply saving and investing. Many financial experts recommend splurging, though the common suggestion is to spend no more than about 10 percent of your raise on fun. So, go on vacation. Take up a new hobby. But don't get carried away and let lifestyle creep blow your budget out of the water.

"One of the biggest mistakes people make with their finances is that they adjust their lifestyle every time they have an increase in income," says Michael H. Baker, a certified financial planner with Vertex Capital Advisors in Charlotte, North Carolina. "Bonus money is a great thing -- just don't be like Clark Griswold and spend it before you actually receive it. If you've worked hard and received a bonus, take a portion of the funds for enjoyment, and add the rest to your savings or investment accounts."

What do you do with a raise? Do you spend it all? Do you save or invest a majority of it? Is lifestyle creep really a problem or not?

Hank Coleman is the publisher of the popular personal finance blog Money Q&A, where he answers readers' tough money questions. Follow him on Twitter @MoneyQandA.


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ga7smi

many people wish they still had their 2011 income level

June 23 2014 at 3:28 AM Report abuse +1 rate up rate down Reply
rj2860

I have been at my job for over 6 years and took a pay CUT a little more than 5 years ago - I made more money in 2003 than I do today. My savings is GONE, my care is 12 years old...I live paycheck to paycheck (have for the last 3 years - hadn't done that since 1992).

I have managed to add a LITTLE to my 401K over the past couple of years, but there isn't any "extra" money. I have a very nice home, but it's expensive with rising utility bills and property taxes. I don't go out very often, take long weekends instead of real vacations, eat mac n' cheese a lot, I open windows instead of using the AC, no cable package, etc.

IF I lost my job - as a single male with no kids, I would be SCREWED - and I pay more taxes than the average person, a LOT more.

All of that and there is constant talk of cutting future social security, starting with my age group - NO!!! I have been working since I was 12, without the social security that I have been promised I can't retire (in the aftermath of the Bush Depression) until I am 72+++ NO thank you.

June 23 2014 at 12:42 AM Report abuse +2 rate up rate down Reply
undrgrndgirl

i'm now earning my 1997 salary. why don't you try that??

June 22 2014 at 11:34 PM Report abuse +2 rate up rate down Reply
elizaanne.lynne

Mr. Coleman, I like the way you think. Everything you wrote makes perfect sense. Thank you!

June 22 2014 at 11:14 PM Report abuse rate up rate down Reply
supermolar

since many people are earning less than they did 5 years ago, living on a 2011 salary should come easy.

June 22 2014 at 10:19 PM Report abuse +3 rate up rate down Reply
lynne66nc

unfortunately A lot of people are not guaranteed any annual raise. IF a raise is provided it usually only averages 1%. Since, health care, taxes, electric, food bills etc increase each year, there really is no way to "ignore" raises for those that live paycheck to paycheck.

June 22 2014 at 7:03 PM Report abuse +4 rate up rate down Reply
wgilroydbc

You can contribute an additional $1,000.00 to your Roth or traditional IRA at 50 not 60 as the article states.

June 22 2014 at 5:50 PM Report abuse rate up rate down Reply
teaparty2implode

GOP States Are The Most Dependent On Government

If we learned nothing else during the 2012 election, it is that some of us are makers, hard-working folk solely responsible for America's prosperity, and others are takers, who want the federal government to pay for luxuries like food and health care.

What may come as some surprise is where these two warring tribes tend to live. The states with elected officials most likely to espouse anti-taker sentiments -- i.e., Republican-dominated states -- are the most dependent on federal spending, while returning the least to Washington in the way of tax dollars.

That's according to the consumer finance site Wallet Hub, which crunched federal tax and spending data and then ranked states from most to least dependent on Uncle Sam. In the map below, green states are the least dependent, while red states -- appropriately -- are the most dependent.
WalletHub

The "makingest" state, according to the analysis, is Delaware. Delawareans -- this is really what they call themselves -- pay $1 in taxes for every 50 cents they get back from the federal government. Delaware also has the lowest rate of federal contracts received, as a proportion of federal tax dollars paid. And the state has the highest gross domestic product per capita, at $72,642.

The "takingest" states, in a tie, are Mississippi and New Mexico, according to the analysis. Both states take about $3 in federal spending for every $1 contributed in taxes. Both states are highly dependent on federal funding as a percentage of state revenue. And New Mexico, especially, has lots of federal workers.

The state with the lowest return on taxpayer investment is South Carolina. Its citizens pay $1 in taxes per capita for every $7.87 in federal funding received.

The two states that come closest to breaking even are Washington and Georgia. These states get back $1.05 for every $1 in taxes paid.

Wallet Hub tabulated its results using three metrics: taxes paid as compared to federal spending per capita, what percentage of state revenue comes from federal dollars, and the number of federal employees per capita. The first two categories were given more weight than the third.

While the rankings are obviously somewhat arbitrary -- one would get different results using different metrics -- they do broadly correspond to patterns of poverty. States like Mississippi and Alabama, which are hugely dependent on federal tax dollars to help feed, clothe and shelter their citizens, are among those with the largest deficits, in terms of what they get in federal help versus what they give back in tax dollars.

For most of American history, bringing home the federal pork, in extra benefits for citizens or spending projects, was a badge of honor for elected officials. The rise of the Tea Party has changed this calculus. Now in the most conservative states it is seen as a political boon to turn down federal handouts. In essence, they are trying to become less taker-y.

The most obvious evidence of this trend can be seen in the expansion of Medicaid, the health plan for the poor, under the Affordable Care Act. Of the 10 states with the biggest dependency gap, as determined by Wallet Hub, seven -- Alabama, Mississippi, Louisiana, Maine, Montana, South Dakota and Tennessee -- have decided not to expand their Medicaid programs, even though the funding would come from federal coffers.

June 22 2014 at 4:32 PM Report abuse rate up rate down Reply
teaparty2implode

Hale County, Alabama

In Hale County, Alabama, nearly 1 in 4 working-age adults is on disability.[2] On the day government checks come in every month, banks stay open late, Main Street fills up with cars, and anybody looking to unload an old TV or armchair has a yard sale.

June 22 2014 at 4:13 PM Report abuse +2 rate up rate down Reply
teaparty2implode

In the 2011 study “Right-to-Work Laws and Fatalities in Construction,” University of Michigan researcher Roland Zullo found that RTW laws lead to systematic underfunding of workplace safety and accident prevention training. As a result, the instances of occupational fatalities were 34 percent higher in Right to Work states.

June 22 2014 at 3:55 PM Report abuse rate up rate down Reply
1 reply to teaparty2implode's comment
teaparty2implode

The fertilizer plant in Texas that killed 14 Americans was found negligent because of lack of safety regulations. It could have been preventable.......

June 22 2014 at 4:00 PM Report abuse +1 rate up rate down Reply