Stuck in a Work and Spend Cycle

When you have a job and make a decent salary but are unable to get “ahead,” it’s easy to assume that if you just made a little more money all your financial problems could be solved. You’d be able to pay off your credit card debt, bring all your accounts up to date, and start to accumulate a nice savings account to show for all your hard work.

However, chances are that if you got a good raise, the money would probably never find it’s way to any bank unless you’re really disciplined. We’ve all heard the saying “the more money you make, the more money you spend.” This statement could never be truer. According to the Bureau of Economic Analysis, Americans have a negative savings rate. Earning more money won’t necessarily get you out of debt and make you save more. It just means you have more money to spend, which could make bigger debt.

Consider this scenario: The Smith family has a combined yearly income of $100,000. They have a relatively large mortgage payment on top of two car payments. They also have $10,000 in credit card debt. A yearly vacation allows for some rest and relaxation with their kids. They’re able to pay their monthly bills, however, there isn’t much left over to save like they should. The Smith’s were fortunate to get pay raises totaling $10,000. Naturally, they were happy and talked about what to do with the extra money and decided on several things that they’ve always wanted—a plasma television, a faster computer, digital cable, to name a few. 

Unfortunately, when the numbers are scrutinized, the $10,000 doesn’t go as far as expected. Although the Smith’s decided to contribute 6% of their paychecks to their 401k’s, the increase is about $6,500 per year, or just over $500 a month, after taxes. Because of their decisions, their monthly expenses have increased by over $600, while their income only increased by $500. To top it off, the Smith’s don’t even know it because they never did the math. Unless they make some big changes, they’ll always be waiting for their next raise that may never come. 

This may sound far-fetched, but it really happens. Even people with large salaries can spend their way into trouble. Pay increases, gifts of money, or inheritance shouldn’t be a ticket to spend more. Take real advantage of the situation by paying off debt or save. In addition, if you pay off your debt but fail to change your spending habits, you’ll end up in debt all over again.