Oran Hall Higher income, a better life – Not always
So you just got a very good adjustment to your salary and you are really happy. Life is going to get better. No doubt about that. That must be the logical outcome. Well, it depends.
It depends on many factors: how well you manage spending, saving, and investing; how well you manage basic lifestyle expenditures and discretionary spending; what your debt situation is and how you plan to treat debt in the future; and how disciplined you are in avoiding the use of investment income for supporting your basic lifestyle.
One basic way to get better off is to save a portion of your employment income on a systematic basis and then invest your savings wisely. More income from employment can potentially give you more to save and invest, but if you are heavily indebted, that may delay or scuttle any move you may want to make to increase your savings as you act to reduce or eliminate your debt.
Perhaps you made many sacrifices in the past and feel you must now catch up. Is that bad? It depends. Here, discipline is critical. Whatever you do, it should not be at the expense of saving or increasing your savings.
Managing your basic lifestyle expenditures remains very important regardless of your financial situation. Your basic lifestyle expenditures are those that are difficult to avoid without changing your basic standard of living. They include housing, food, clothing, and transportation and tend to account for a significant portion of a person’s expenses.
Some people’s basic lifestyle expenditures go beyond these. No reasonable person would disagree with including education, and some people, considering the situation of close relatives, see financial support to them as an integral part of their expenditure.
But even basic lifestyle expenditures can be made to vary to fit circumstances depending on the choices you make, and people often make choices that reflect changes in their tastes. Higher tastes cost more. For example, will you buy a fancier, more-costly-to-maintain car? Will you “change” your car more frequently? Will you opt to move to a community where the rent is higher or trade up to a better neighbourhood at the cost of paying a higher mortgage?
Discretionary expenditures are those over which you have much control and reducing or eliminating them tends not to significantly reduce the quality of your life. Here is where the situation can get overboard, so it is important to exercise control over how much is spent on vacations, entertainment and gifts, for example, for sometimes there is the strong temptation to buy what costs more or to increase the frequency of the spending.
Regardless of what your income is, it is important to determine what portion of it should be for the different types of expenditure and to stick to your plan.
You must maintain focus on how much of your income you need to invest so you can realise long-term goals while at the same time focusing on shorter-term goals that you must realise.
Earning more does not obviate the need to do certain basic things. The imperative to give priority to needs over wants never changes. Similarly, saving in preference to pursuing a strategy of instant gratification is always sensible. Keeping good records and controlling and monitoring expenditure is the key to maintaining control over the use of your income, whether it is high or low.
It is not unreasonable to assume that more employment income means more money to invest. As people have more to invest, they are better able to take more risk and to diversify their portfolio. But this should not be done with reckless abandon. And investment income should not be seen as a means of generating funds for meeting general life style day-to-day expenditures.
Income from dividends and interest, for example, are best reinvested to give a boost to the portfolio. This is not to say that investment must just be for the classic long-term goal of retirement.
There are other goals that a good investment portfolio can generate funds to bring to fruition. Education is a good example. So is home ownership.
Regardless of how well the investment portfolio is doing, avoid being reckless and greedy. Remember that markets move in cycles. Sometimes they go up. Other times they go down, so educate yourself about investment matters and avoid following the crowd.
So,if your employment income has increased of late, don’t get carried away. It would be a shame if you do not cause yourself and your family to be on a better path to financial security.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com