How to Turn Your Pay Rise or Bonus Into Money That Will Work for You
Congratulations on your new salary or bonus. But remember, if you don't invest some of it, you're just as dependent on your work as you were last month.
By not investing, you've fallen into the trap of lifestyle inflation. No, not the inflation you hear about on the news.
This is the inflation of your lifestyle to suit your new income. It's easy to fall into, and most people do.
Let's look at two hypothetical lawyers to illustrate this concept.
Case Study: Two Lawyers, Two Financial Paths
Lawyer A: The Non-Investor
Lawyer A, let's call her Jane, starts her career with a salary of $150,000. Each year, Jane receives an average salary increase of 15%. Over the next few years, she sees her salary grow significantly. Here's a simplified breakdown:
Year 1: $150,000
Year 2: $172,500
Year 3: $198,375
Year 4: $228,131
Year 5: $262,350
Jane's lifestyle expands with her income. She buys a more expensive car, upgrades her home, and takes luxurious holidays. By the end of five years, her salary is $262,350, but her savings haven't grown much because she hasn't been investing. She remains dependent on her job to maintain her lifestyle.
Lawyer B: The Investor
Now, let's consider Lawyer B, who we'll call Sarah. Like Jane, Sarah starts with a salary of $150,000 and receives the same 15% annual increase. However, Sarah decides to invest 20% of her income each year. Here's how her finances look:
Year 1: Invests $30,000
Year 2: Invests $34,500
Year 3: Invests $39,675
Year 4: Invests $45,626
Year 5: Invests $52,470
Sarah's investments grow at an average annual return of 7%. Here's how her investments accumulate:
End of Year 1: $32,100
End of Year 2: $72,093 (Previous year + New investment)
End of Year 3: $121,739 (Previous year + New investment)
End of Year 4: $183,465 (Previous year + New investment)
End of Year 5: $260,978 (Previous year + New investment)
By the end of five years, Sarah has a substantial investment portfolio of $260,978. Unlike Jane, Sarah has made her money work for her, giving her a sense of freedom and flexibility that Jane lacks.
The Benefits of Investing
Investing a portion of your income, like Sarah, creates a safety net and opens up opportunities. Here are some key benefits:
Financial Freedom: With investments, you have the option to step back from work if needed. You aren't solely reliant on your salary.
Growth Potential: Investments grow over time, providing you with more significant returns compared to just saving.
Flexibility: Having investments gives you the flexibility to make choices that suit your lifestyle, such as taking a sabbatical, starting a business, or pursuing a passion project.
By avoiding lifestyle inflation and choosing to invest, you can ensure that your money works for you, providing security and opportunities for the future. Remember, it's not just about earning more; it's about making your money grow and work towards your dreams and goals.
Want to know more?
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The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.