Imagine a raise or money raining down from the sky. You will want a better house, more meals out, continuous getaways... Income goes up, but so does consumption and expenses, which prevents you from saving more or ending up just as drowned even if you earn more. This is what the theory of increasing spending says: without control, the more you earn, the more you spend.
The piggy bank remains in the background and waste and debt come easily. Earning more or having new income is the best news, but to avoid disappointment and impact on our savings and future, control and planning are essential.
The big mistake is not stopping to think, celebrating by seeking whims and leisure, experts point out. Before starting to spend, you have to “considerately plan the destination of the increase in income,” says Juan Manuel Mier, head of BBVA My Retirement. Manage to break “the present bias” that prioritizes consumption and gratification today over long-term goals, such as saving for retirement or a home. It's time to take a snapshot of income and disbursements, set a goal, provide our emergency fund with more money and invest so as not to lose purchasing power. It is also a good idea to prioritize getting rid of debt.
It's not about stopping spending, but about doing it wisely. Mier recommends getting advice when planning, such as the tax implications it may have, and dividing the increase between items: essential expenses – better quality in what you buy at the supermarket or better housing –, leisure and savings. Here we must ensure that not all of the increase becomes an expense: “Depending on our economic capacity, we should at least save between 15% and 50% of the increase.”
The common way for income to grow is a salary increase. In those cases, if the financial situation is under control, they usually go for a better home, a car, hobbies and leisure. But “when unforeseen and high extraordinary income is obtained, such as a lottery prize, the money usually goes more towards superfluous expenses,” says Mier. Precisely the ones that need to be watched the most. Needs are created that are not necessary to convey an image, to project, he says. Expensive tastes, luxuries... “It can be a high risk to live beyond your means. Consumption has to be conscious, balanced, responsible.”
What is the risk? Mainly, ending up spending more than you have and using up financing. “The debts of a person who has lived beyond his means are very difficult to resolve if he loses his job, for example,” warns Andrea Carreras-Candi, director of the association of financial advisors and planners EFPA Spain. “Growing income can be a gift and a trap at the same time.” It is advisable to accept it with caution. “Sometimes it makes us think that we can incur larger payments, without taking into account the need to save, and it makes us fall into increasing expenses,” she explains.
You have to indulge, but in moderation. That visits to restaurants or long vacations are imposed “gives rise to increasing recurring expenses considerably,” Carreras-Candi continues. Once again, planning comes into play. Basic and dispensable consumption must be reviewed, adjusting the latter even if they are the ones that are enjoyed the most. Javier Montaraz, general director of Grupo Bárymont, financial planning, points out that the superfluous are the ones that can increase the bill the most. They depend on age – more leisure in young people –, children – more spending on housing with them –, financial situation – if there is debt – and the market – if you can't afford the house you have to save more. “Increasing our spending directly in the same proportion is a mistake. We must take advantage to add savings and achieve vital objectives.” Among others, if income changes the pension, then it must be higher to maintain the standard of living.
As a solution, the expert proposes changing the way we see things. Think about pre-savings more than savings. Normally, people look at what is left after spending income, the remainder at the end of the month, as savings. The formula income - expenses = savings. “We should use pre-savings. The formula income - savings = expenses. Thus, if we maintain fixed expenses, savings will always increase if there is an increase in income.” You could even save in its entirety, the ideal. Before you start paying, there would already be a part that has gone to the piggy bank.
