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How often have you found that you’ve already spent your annual raise without even thinking about it?  It’s so common, most of the time we don’t even have to think about it, it just happens, and that’s the problem.  I call this phenomenon paycheck creep. Remember the days when you were just starting out and you lived paycheck to paycheck?  Money was a source of stress.  You thought, if I just had another $100 or $200 this month I would be set, no more stress. Fast forward to today. How many thousands of dollars in raises have you banked?  And how often are you still spending way more than you wanted?   

Unless you take action to prevent paycheck creep, it’s going to happen whether you intend it or not.  After all, once taxes come out, it doesn’t seem like such a huge increase. And from there, it’s easy to allow ourselves an additional splurge as a reward, or find new recurring expenses that is supposed to make our life easier.   Most often I see paycheck creep seep into transportation/travel budgets, bar tabs and restaurant spending. You don’t have to be a big spender on “things” for it to get out of control.

Money and Happiness

In the end, are you happier than when you were just starting out financially?  Maybe a little, but it’s definitely not proportional to the increase in your salary.   So why do you keep increasing your spending?  

This tweet and blog from from Carl Richards is so true here:

Plan Ahead

Here’s another pitfall, potential life changes are usually on the horizon which could cost us, and would be easily affordable if we just planned for it.  For instance, a dental procedure, an increase in condo fees, a big vacation, or moving into a new place.  When these things pop up, we act as if they were unexpected and we have to “make up the difference” in our budget somehow. But that’s not true, we can take the time at the beginning of the year to figure out some of these “what ifs” and make a budget to save for them.  

The way you combat paycheck creep, is by taking a minute to respond and plan instead of merely reacting.

Reacting to financial situations like these are one of the big problems I see all the time.  It’s something I wrote about in a 3 part series last year.   Don’t react, plan ahead.  

When I work with clients, I always suggest creating different savings accounts for goals. For instance, set up a separate savings account where you automatically put aside some money each month for your travel budget. When the balance reaches your target amount, you know you can plan and take a trip.  It helps prevent you from taking advantage of that awesome flight deal now and then forgetting about the fact that you need to book lodging and ground transportation later, all of which could end up being more than you wanted to spend.  The separate account also visually confines you to a budget for the year, because it’s easy to get the mental math wrong reviewing your credit card statements. 

Short Term Thinking

If you don’t actively do something different, it’s really easy to react to financial changes without processing how your action (or inaction) may affect you in the long run.  We often value the impact of things happening in the short-term more than planning for things happening in the long-term.  This leads us to use short-term thinking to value buying things now when new money comes our way rather than setting aside savings.  

This works against you when you want to do big things in the long run, such as retire one day, put a down payment on a house, or have a family.   

You have an opportunity to fix this unproductive behavior.  It’s a new year after all.  Start by making a plan for the raises, bonus and/or tax return you expect to get this year.  

Goal Setting Worksheet

Here’s a worksheet of questions to think through to help you set and stick to your financial goals:

What are your financial goals for this year?
 

 

What are your financial goals for the next 5 years?
 

 

What are some stretch goals you’d like to achieve, but you’re not sure how you’d get there financially?
 

 

What’s a financial estimate (even ball park) for each of your goals?
 

 

Knowing what you wrote down for your goals, how do you plan to earmark any bonus or tax return that you receive in the coming months?
 

 

What are your plans for “paying yourself first” out of your raise this year?  Paying yourself first means putting funds toward savings goals before you spend on current consumption.
 

 

How do you plan to navigate upcoming changes in your life?  Examples include a new job, relocation or shifting to a new life stage.  Will they impact your goals above?
 

 

How would you handle a large unexpected expense of a couple thousand dollars?  Would you have to borrow or could you cover out of existing savings? If you’d have to borrow, what’s a good target for building an emergency fund?
 

 

Just writing these things down is going to get you further than a lot of people.  But it’s good to get some accountability as well. Here are a few bonus tips for sticking to your goals:

  • Tell a friend about your goals.  Hold each other accountable with check ins, maybe on a monthly basis.
  • Work with an advisor to keep you on track and help you fine tune your projections and evaluate your financial decisions in depth.
  • Get detailed and make some decisions.  You can’t just set simple goals like “I want to get out of debt.”  You need to put dollars and cents behind it and tell yourself HOW you’re going to do it. Create “SMART” goals that are Specific, Measurable, Actionable, Reasonable, and Time oriented, so you have a deadline.
  • Write down an obstacle that could get in your way.  It seems counterintuitive, but visualizing where you might fall short is a mental trick to help you avoid pitfalls.  Once you acknowledge them, it’s easier to move past them and figure out how to work around them. 
  • Make changes over time.  If you try to slice and dice your budget all in one sitting, you probably won’t stick to it.  That’s why I suggest starting with making a plan for new money coming in, like a tax return, to get you started.

What do you think? Did you learn anything you want to put into practice? If you filled out the worksheet, feel free to share it with me.

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