I am in a lucky position compared to some of my colleagues across the country. I am in a job where I have received a raise (albeit small) for the past few years or so. And I expect to receive a raise for at least the next two years unless another devastating recession hits. In order to keep myself saving at the 15% and higher I automatically save at least half, if not all, of my raise.
Now I am in a unique position in that I actually have three retirement accounts. I have a 401(a), a 403(b) and a Roth IRA. Because I am mandated to put a certain percentage of my paycheck into my 401(a) my contributions automatically increase. However, the increase isn’t enough to keep up with the amount I want to save. So whenever I get a raise I go into human resources and add about $25-$50 of what I save each paycheck in my 403(b). Considering that my raises typically amount to about $40 per paycheck (I get paid every two weeks) I am essentially saving almost all of my raises, which increases my savings rate.
Why Save My Raises?
I save at least half if not more of my raises for few reasons. First, now that I am a homeowner I know exactly what my housing costs will be really for the rest of the time we have the house. Yes, the taxes and insurance will go up, but based upon my estimations it won’t be more than about $20-$30 per month each year. My margins are not that tight in my budget where I can’t afford those increases. And if I couldn’t I would reduce my retirement contributions accordingly. So I can afford to save those raises because of the fixed nature of my housing costs, which for most people is the largest part of your budget.
Increases My Retirement Savings
I also save my raises because it increases my retirement savings. For those of you who read this blog you know that my goal is to get out of debt and to achieve financial independence. Financial independence for me is to determine whether or not I want to work. I don’t want to work because I have too. I can’t reach that point without saving. The more you save, the closer you reach your goal. So I am trying to reach my goals faster.
Too Much Temptation
Another reason I save at least half of my raises is because I don’t want the temptation of spending the money. I like my money to do things. Now I could certainly use that money to increase the contributions to my debt payments and the like, but with such low interest rates on both and me on track to pay it off by the time I am 45 it seems more prudent to put that money to work.
Moreover, if I know it is going to a place where I can’t get at it I won’t be tempted to spend it. I have to work within the budget I have and that is fine by me. I am sure I could fine plenty of things to do with that money, but I prefer to put to work for future use.
Helps With My Tax Savings
This month I plan to do our taxes and I anticipate a huge tax bill. This marks two years in a row where we have had to pay the IRS a few thousand dollars. So I have increased the amount of my money taken out of my paychecks (it is complicated why enough hasn’t been taken out already) to the point where my 401(a) savings and with my 403(b) I should hit the IRS maximum of my ability to put money into pre-tax retirement accounts, which is $18000 for 2015. I haven’t done that in the past. I haven’t even gotten close. By increasing my retirement contributions I lower my tax bill and hopefully I won’t owe the IRS as much, if anything, next year.
Avoiding Lifestyle Inflation
A final reason I don’t spend my raises or add them to my paycheck is because I want to avoid a lifestyle inflation. I am trying to lower my spending and expenditures, not increase them. Having more money around can lead to a mentality that I can spend this money. I deserve things. Let’s go get some stuff. Well, how much stuff does one really need/ Now for our house we do need a couple of things like a dining room table with some chairs would be nice, a couple of rugs, and some patio furniture. However, I think I am going to try to work that out of my current budget. That way I don’t have to worry about whether the extra money is coming in or not. Because what happens when we buy those items? I could certainly save it or put it toward debt, but there is always something that I supposedly “need.” That need is really a want and by reducing my take-home income, even with a raise, I reduce the “need” to increase my lifestyle. I already did that when I took out student loans. I don’t need to do it again.
The Bottom Line
Practically everyone who has a job will get a raise in their lifetime. It is possible you won’t and you may even have to take a pay cut and if that is the case you need every dime to scrape buy. But many people will increase their incomes over time. Over half of my friends own homes. They know what their monthly expenditures are. By saving your raises you increase retirement savings, avoid inflation creep, and increase future flexibility because you will have the money to do what YOU want to do into the future. The faster and more you save the more your nest-egg will grow.