Save Your Raise (Finance Game #1)
August 4, 2008 – 6:01 am
My favorite financial game or trick at the moment is one I call “Save Your Raise” (aka “My Boss Is A Deadbeat”). This game essentially involves saving all raises and bonuses for an extended period of time. My wife and I are at a point where our annual spending needs are pretty stable, and with some effort I think we earn enough to make ends meet without requiring an annual raise. Of course a raise is always nice, and I’m not one to turn such things down. 
My goal is to maintain our current lifestyle without the use of raises for ten years. This means that I need to offset inflation, one-time emergencies, and all other unexpected items within my current salary. Although this may appear to be harsh or difficult, it doesn’t have to be. My usual annual review yields about a 2%-3% raise, not counting any promotions I might get over the years.
Think about it this: there are thousands of families that make less than you do right now and can still make ends meet. Why must you adjust your lifestyle upward every time you get a raise? That’s just crazy if you ask me, and I’m tired of watching raises and bonuses slip through my fingers like water.
Just think about the possibility of doing this for several years, if not ten. Let’s say you earn $50,000 a year now and get about a 3% raise a year. Next year you’ll earn $51,500, $1,500 of which can be saved (not counting taxes and tithe). The next year you’ll get another raise of $1,545, but you won’t save just $1,545. You’ll actually save $1,545 + $1,500 = $3,045. At the end of five years you’ll be saving almost $8,000 per year, and this doesn’t even include any raises or bonuses you receive!
And might I remind you that the average household in America earns about $40,000 per year. That means you already earn 25% more than the average American household even before you started this game! Now I realize that an income of $50,000/year is much more than some of us earn and much less for others, but the idea of maintaining your current lifestyle can be achieved if you make an effort.
“But what about inflation” you ask? The published inflation numbers are very different from the inflation your personal household is experiencing (either up or down). And I’m not even talking about the never ending argument that the government’s inflation numbers are under reported. What I’m saying is that we all spend money on different things, and my experienced inflation will be different from yours and the governments’. Inflation on food and fuel is probably noticeable by everyone, but inflation on computers, cars, and houses may not affect you at all unless you’re planning to buy those items in the near future.
My wife and I are learning to be content, and we agree that our current level of income should be sufficient to reach “content” and “happy” every year for the next few years. Will we make it 10 years? I don’t know, but I’ll willing to try. I also know that as part of my 10-year game we do have some planned annual after-tax savings money that we could use as a small cushion. This money is being saved for a new (used) car and a few other near-term purchases, but it could also be used to replenish the emergency fund if need be.
And after the ten years is up we could continue to increase our lifestyle by any raises, promotions, and bonuses I receive because our retirement savings plan will be in place. We’d be able to continue to save our accumulated annual raises and hopefully that will be sufficient to fund our retirement.
How Do I Implement This Strategy?
In my opinion the best way to make this strategy work is to make it automatic. Two ways to do this include:
- you can increase your retirement account (401k, 403b) by your annual raise percent until you’ve reached the federal maximum. I believe you should also have some after-tax and Roth investment accounts as well, but this is a good option for most people.
- have your payroll office split your pay into 2 different bank accounts (or perhaps one checking account and one mutual fund or investment account, like Vanguard for example). Every year when you get a raise update how your income is split between the two accounts so that you continue to get your same “salary” of say $50,000 every year. My company can split my pay either by percentages or by a fixed dollar amount, so in the example above it would be easy for me to tell them to deposit my weekly spendable pay into one account and everything else into another account. That way I wouldn’t even need to make an annual adjustment when I get my raise.
- Have your income deposited into your checking account, and setup an auto-investment plan that will withdrawal the “extra” income each pay period into a separate account. Most mutual fund companies will set this up for you free of charge, and it’s pretty easy to change each year when you receive your raises and promotions.
Image Credit: jimwhimpey
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7 Responses to “Save Your Raise (Finance Game #1)”
When my husband got his raise, we automatically deposited half into our money market (emergency fund) and then we let the other half flow into our budget. That way we were saving something, but we still felt like we were getting a little bit ahead.
I admire your 10 year plan a great deal. Maybe that’s something we can shoot for starting next year. (gotta get kids out of diapers first!)
By
Christina@Northern Cheapskate (Who am I?) on Aug 4, 2008
This is an excellent idea. Inflation might not be the only wrench, but the rising income taxes will force you to be more frugal each year.
By
Pinyo (Who am I?) on Aug 5, 2008
This sounds like a fun challenge. It’s good to look at a raise first as an opportunity to save or invest more rather than increase your standard of living, and thus your spending. Still, good to reward yourself a little!
best of luck!
By
NtJS (Who am I?) on Aug 13, 2008