Beware of spending away from that salary bump

A woman checks a job advertisement board during the COVID-19 pandemic in Toronto on Wednesday, April 29, 2020. Inflation is driving up the cost of living and eating away at some wage gains, but employees with a jump in Salary can also experience lifestyle creep – a phenomenon where discretionary spending on non-essential items seems to increase along with someone’s salary. THE CANADIAN PRESS/Nathan Denette

In early April, Kelsey Cruz did what many are doing in this time of low unemployment and high demand for talent, she left a job she loved for one that promised new challenges and higher pay.

In her new role, the 26-year-old Toronton has managed to secure a $40,000-a-year raise, but Cruz still worries about overspending as her lifestyle potentially climbs with her salary, especially with the inflation so high.

“I feel like a lot of my friends and people I hang out with are in a similar place in life. They’re all doing well, so sometimes it feels like you’re trying to keep up with them, and that can be expensive,” she said.

Cindy Marques, co-founder and CEO of MakeCents, a financial coaching company for millennials, said she often sees lifestyle drift — a phenomenon where discretionary spending on non-essential items seems to rise alongside to someone’s paycheck – with clients who are caught in a paycheck-to-paycheck cycle. Even after getting a raise or a new job with higher pay, they’re still stuck living paycheck to paycheck.

“Unknowingly, they slowly end up adjusting their spending agreement based on the money they have. They end up using it all without really improving their financial situation,” Marques said.

Lifestyle drift can also occur among the self-employed with sporadic earnings, Marques said. Whether they are having a good month or a tight month, any extra income always ends up being spent.

Cruz said that she had already seen her expenses go up. Since the new job, she’s been spending that extra income on daily Starbucks groceries, going out to bars and restaurants more, and taking Uber rides without hesitation.

“There are so many monthly expenses that are so unnecessary, but since I’ve been making more money, I’ve justified to myself that it’s OK because I can afford it and because I have an ‘I’ mentality. merit” when it comes down to spending money.

Fighting lifestyle creep comes down to tracking your spending, Marques said. Most problems arise when you don’t know how money comes in and goes out of your account.

“Subconsciously, we end up adjusting our own spending based on what we see is available in our checking account,” she said. “Nothing really looks different.”

Instead, those receiving a raise should create a plan for the extra money they will earn. If unrelated to covering the cost of inflation, Marques recommends that Canadians set up automatic savings contributions to use some or all of these extra funds to increase their net worth.

Marques said she does this with her own earnings so “future Cindy” can benefit from her savings, which she calls her freedom fund.

“The way I spin things is to allow you to spend more because you earn more, but also to allow you in the future to spend that money,” she said.

For those wondering if they should use the extra cash to improve their lifestyle, Marques said to take it on a case-by-case basis.

For example, if you’ve dreamed of renting a bigger apartment throughout the pandemic, but it always seemed financially out of your reach, a raise would be a good time to consider allocating more money to a move. .

However, if you sporadically think of things you can buy that you didn’t necessarily need before, it’s better to resist the temptation than to make a purchase right away, she said.

In Cruz’s case, she always finds the right balance between saving and enjoying the fruits of her hard work.

“With the new job, I had to look at my finances and create a new budget to make sure I saved more, but I also allocated more money to entertainment and personal care services, like nails and the hair.”

This report from The Canadian Press was first published on May 10, 2022.