For anyone saving money to achieve financial goals, such as paying off debt, buying a home or preparing for retirement, it’s disheartening when 2013 wages are only slightly higher compared to 2003 wages and are down slightly compared to 1993 wages. The reason for this is that between 1992 and mid-2009, wages increased on average between 2.5% and 4% and since mid-2009 have barley increased 2%. This isn’t even keeping up with the rate of inflation. That means that the costs of what you buy is increasing while the value of your dollar is decreasing. A carton of eggs cost more today than ten years ago, while incomes have remained steady.
Expectations are that wages will increase in the latter half of 2014, but there’s no guarantee. If you can’t count on your boss to help you meet your financial goals, what can you do? You can give yourself a raise. How can you give yourself a raise? You can give yourself a raise by living below your means and not increasing spending in one category when you decrease or eliminate spending in another. Here are some examples:
When we realized that we were financial messes, our grocery budget was one of the first spending categories we analyzed. Essentially, we didn’t have a grocery budget. We were spending over $300 a week for two people on groceries between weekly shopping when we bought the bulk of our food and unplanned stops for miscellaneous items. Additionally, we dined out at least once a week. It’s not a stretch to say we were spending $500 a week on food and most of that was bought on credit.
After analyzing this and learning how to grocery shop with a grocery list and menu, we cut our grocery budget to $150 a week and started dining out a lot less. That gave us an extra $7,800 a year. For us, that was like receiving a 5% raise without having to rely on our bosses. That’s pretty significant when the highest average wage increase over the last 20 years was 4%.
As is our nature, we were tempted to put that money towards frivolous spending on clothes and going out, but we used it to pay off our credit cards. This let us focus on our long-term financial goals of traveling, saving for retirement and paying off our mortgage.
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We have two cars, a junky, old Jetta and a sporty Mini-Cooper. We made our last payment on both cars two years ago. Since then, we haven’t had a car payment because we haven’t bought a new car. Both require regular maintenance, gas and insurance, all of which, on an annual basis, are cheaper than car payments.
When we made our last car payment, we automatically had an additional $7,200 in cash a year. That’s like receiving another 4.5% raise.
The Jetta is a little embarrassing and the Mini is fun. We’d love to replace the Jetta with an Audi A4, but buying one now won’t help us achieve our long-term financial goals. Since both cars have been paid off, we’ve been using the extra $7,200 a year to help us meet those goals rather than using it to buy another car, more clothing or paying credit card interest.
The inspiration for this article was that last night we talked about how we’ll pay off our mortgage in about two years. Our mortgage payment is $900 a month. Once it’s paid off, we’ll have an extra $10,800 in cash each year.
On top of our earned income and previous savings, that’s like receiving another 6.5% raise. We aren’t buying another house anytime soon, so we’ll use this extra money to fund our remaining financial goals of traveling and saving for retirement.
You can give yourself a raise by controlling any spending category, such as entertainment, clothing and hobbies. By creating a budget for each category and having a plan, i.e., a grocery list/menu and social calendar, you too can manage your expenses. By using as motivation your long-term financial goals, it will be easier to avoid short-term gratification.
With just these three examples, we’ve shown how we’ll give ourselves a 17% raise over twelve years. Factoring savings from other spending categories and traditional raises we’ve received from our bosses over this same time, we’re achieving financial goals that may have otherwise taken 20 to 30 years.
In all honesty, our quality of life has also increased, but we’ve been cautious to not be distracted from our true goals.
When you reduce a spending category, don’t increase spending in another. When a spending category is eliminated, don’t be quick to add it back to your expenses. By doing this, you’ll have extra money to achieve your long-term financial goals sooner. Achieving long-term financial goals is more rewarding than short-term gratification.