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Get a Raise Recently? Watch Out for the Creep Around the Corner

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The economy is healthy and the job market is fiercely competitive for employers looking to maintain workers or hire. That’s a perfect recipe for a raise in salaries and wages, and indeed, we’re seeing it with many of our clients. We’re not just talking a percent or two. In some cases we’re seeing raises of twice that or more.

We’re delighted to see the increasing wages and we’re excited to help clients utilize the funds in ways that improve their current lifestyle while also improving their financial futures. We’d be remiss if we didn’t share a warning about the double-edged sword that goes along with a raise: lifestyle creep.

In a nutshell, lifestyle creep is the gradual increase in our spending, expectations, and standard of living that occurs as income increases. When income goes up, so too does spending. It’s usually incremental, like slightly better restaurants, cars that are a little more expensive, vacations that are a bit nicer, or bigger houses. Over time, we become used to these improvements and it’s terribly difficult to conceive of a reduction in our standard of living. Long term, it means that the expectations we have for retirement are also higher and the amount of savings needed to fund the dream is significantly bigger too.

Unfortunately, what often doesn’t go up along with the raise is our rate of savings. For example, we keep the emergency fund at the same level, our monthly transfer to an IRA stays the same, or our contribution to our 401(k) retirement account remains the same. Over time, the result is an increased lifestyle that is supposed to be supported on the same amount of funding. It’s not going to work.

How much should you save?

The solution is obvious: increase your savings along with your income. But how much of the raise should be saved? Morningstar recently completed a study of this topic and they suggest the following “rules.”

  • Spend twice your years to retirement: If you are going to retire in 10 years, you should spend 20% of your raise and save the remaining 80% for retirement.
  • Save your age, as a percentage of the raise: If you are 50 years old, you should save 50% of the raise.
  • Save at least 33% of your raise: If your take-home income increased by $1,000, you should save $333 of that new income.

You can read more from Morningstar’s research here.

Financial “rules” are a great place to start, and any of the rules above will certainly put you on a better path than adjusting nothing.  A better way to go, however, is by a personalized plan. No one’s fingerprint is the same and we’ve never seen two people who have the same financial situation either. Maybe you’re behind in savings, maybe you’re ahead. Perhaps you want to make sure you provide for future generations of your family. Perhaps not. No matter what your goals or values may be, making sure your plan fits you is always a good “rule.”




wisdom wealth strategies

Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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