Let's talk about what happen when there is a jump in salary. What do most people do with their new salary increment?
Let's say Joe's monthly salary is $2500 and he has just been given a raise of $125. A typical 5% increase in salary. Joe is both happy and overjoyed.
And so he decided to stepped up his lifestyle:
- get his monthly haircut at a more 'premium' saloon which is $40 instead of the usual $20
- more restaurant meals and clubbing with girlfriend - monthly expenses goes up from $500 to $700 a month
- signed up gym membership for $80 a month
From the look of it, most people, including Joe, do not really think there is anything wrong with this little increment in expenses since he has just been giving a raise in salary.
Well, let's do an analysis of his increment in salary vs his 'minor' monthly expenses.
- His increment in salary: $125 (up 5%)
- His new monthly expenses after salary increment - $300 (up 12%)
- $20 (haircut)
- $200 (restaurant meals + clubbing) +
- $80 (gym membership)
There was a 5% increase in salary and that causes Joe to up his seemingly little increment in lifestyle expenses by 12%.
Let's assume Joe used to save $300 a month before the salary increment. After the rise in salary ($125) and his new increase in expenses ($300), he can now only save $125 (58% lesser in saving).
Most people, myself included, have not really looked long and hard into our monthly expenses and it remains a myth to me why people always tend to spend way more than they used to after a salary increment.
A raise in salary may not be a raise after all if we end up saving less each month
