Many consumers insist that, after they pay the bills, there is usually very little money left over to increase your savings and investments. And, in many cases, this might be the truth. It can be difficult to find the money to put aside for a rainy day when you have groceries to buy and other more pressing expenses.
However, there is one way that can increase your ability to save: By simply increasing your savings by the amount of your raises, you can quickly build up a nest egg without noticing any change in your lifestyle or spending habits.
How Your Raise Can Result in a Bigger Savings Account
Raises and bonuses, rather than being seen as an excuse to indulge in lifestyle inflation, should be seen as opportunities to boost your savings. This includes your retirement savings, which are usually in the form of tax-advantaged retirement accounts. Anytime you receive a raise, devote a percentage of it to your savings efforts. That way, you don't have to cut spending. You don't see much of a change in your lifestyle, but you will see a positive impact on your nest egg.
One of the best strategies is to put a portion of your raise into your tax-advantaged retirement account. Since your raise is taxed at your marginal tax rate (it may even bump you up to the next tax bracket), the best use of a raise is to contribute it to your RRSP so that you truly get to save or invest every dollar of that raise.
Here is an example of how this scenario might work: Say you make $40,000 a year and get a 3% raise each year. In your first year, you would have an extra $100 a month that could go into TD e-Funds within your RRSP. What if you continued to live on the same $40,000 salary, and kept contributing the raises to your RRSP for 10 years? If the investments were growing at 7% a year, in 10 years you would have an RRSP worth over $90,000!
You don't even have to put the entire amount of the raise aside. If you get a raise, and put even three-quarters of it into an RRSP or TFSA, you could boost your savings by quite a bit, and you wouldn't even have to reduce your current lifestyle to make it work.
Avoid Lifestyle Inflation
The real key in this case is to avoid lifestyle inflation. If you increase your spending and regular expenses with each raise that you get, it really is impossible to save more. Instead of spending more over time, channel the extra into your savings.
Ask yourself if you really need to add more expenses to your life. Does it really make sense to tie yourself down with more obligations — just because you make more money? Or does it make more sense to keep living the same lifestyle while creating a more secure financial future?
This doesn't mean that you can't have a little fun, or do something nice when you get a raise. It makes sense to use some of it now. But your best bet is going to be making the “fun” spending temporary, and committing to savings for the long term.