A financial planner uses a 2-step exercise to help clients find the 'freedom' in getting a raise

Westend61/GettyUse this financial planner’s quick exercise to combat lifestyle inflation.
  • Pay raises can lead to lifestyle inflation: the tendency to spend more as you earn more.
  • One financial expert asks clients to list their spending and compare it to their new income – oftentimes it results in a cash surplus.
  • This number represents a freedom of choice, he says, and helps people make a conscious budgeting decision, rather than an impulsive one.
  • This article is part of a series focused on millennial financial empowerment called Master your Money.

The US economy has been through the wringer this year, but about 84% of employers said they still expected to deliver raises to employees on schedule next year, according to a survey of 705 companies by the consulting firm Willis Towers Watson.

There’s a certain type of high that accompanies a pay raise. It’s a mixture of pride and possibility; we know money can’t buy true happiness, but this feeling might fool you, if even for only a moment. All too often, that increase in income leads to an eventual increase in spending, a phenomenon typically referred to as lifestyle inflation or lifestyle creep.

Depending on your financial situation, bumping up your spending may be warranted — say, to put more money toward paying off debt or buy services or products that enhance your quality of life or save you time. But at the end of the day, the ticket to building long-term wealth is spending less than you earn and saving or investing the difference, regardless of where you fall on the pay scale.

To help people combat lifestyle inflation and make the most of a pay raise, certified financial planner Eric Roberge performs a simple exercise that usually results in a gratifying “aha moment” for his clients, he said during a Master Your Money roundtable discussion.

A 2-step exercise reveals the ‘freedom’ that can come from a raise

When a client comes to Roberge with news of a raise, he asks them to list how much money they spend each month and on what. Next, he tells them to compare their new income — after accounting for how much will be taken out in taxes and workplace benefit costs — to that monthly spending amount. The amount left over is usually a big surplus, Roberge said.

“Then they look at that and they say, ‘Wow, that’s great. What do I do with that?’ And that’s the question that just lights me up because then I say, ‘There’s the freedom right there,'” he said.

With this visual as guidance, people are more likely to make a conscious budgeting decision, rather than an impulsive one.

“They have the ability to expand their life in some way now by spending more on something that they really like or — hopefully — saving more money for something down the road to provide them that same freedom later,” he said.

Oftentimes clients will realise that they’re comfortable with their level of spending as it is, Roberge said. Then, saving or investing their extra income doesn’t feel like such a sacrifice.

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