Why you feel you earn a lot but don’t seem to have much money to spend
You’ve been working for about a decade now and are advancing nicely in your career. Your income has increased substantially since you started. The problem is, you don’t seem to be making the same advances with your finances as you do with your career. You are making way more money now, but still don’t have much to show for it…
If this is something that you have thought to yourself, you are not alone. It is a very common concern for young professionals – our finances don’t increase at the same rate as our career advancement. This can become really frustrating! Here are the 5 main reasons why you aren’t saving and investing as much as you should, and what to do to fix it:
Lifestyle inflation: this is when your spending increases to match your income. When you start working after years at Uni or in a traineeship you start eating at real restaurants instead of McDonalds. As you get a promotion or pay rise, you upgrade from Mimco handbags to Marc Jacobs. Your wardrobe gets a makeover. And of course, you go on bigger and better holidays! This is natural and I believe a good thing – we need to reward ourselves to continue pushing forward. The issue comes when the spending increases as much as your income. Serious problems come from the spending increasing more than income.
The trick to overcoming this is to put aside a set amount per pay (more on this below), which will increase in line with pay rises and promotions. We also like the idea of paying from your future self – use half of your pay rise for investing and you keep the other half for discretionary spending.
We aren’t taught about what to do with money: we get taught a lot of things at school, but money management isn’t one of them. Even in the accounting and economics classes in high school, or through any of my finance subjects at Uni, we didn’t speak about how to actually manage your money. So when we finish school and find ourselves in the real world the advertising and marketing of big businesses hijacks us.
We get a job, our income start to increase and we need a new car so we get a car loan. Personal loan and credit card offers are being thrown at us left, right and centre and before we know it all of our income is being used up. This is when people start living paycheck to paycheck. They think ‘if only I earn more income’, and the spiral begins!
To get out of this cycle you have to educate yourself – there are heaps of books, article and videos about money management. Go read and watch some. Then sit down and make a plan based on what you have learnt. If this is too hard, get some help from someone who has a track record of results. It will be one of the most rewarding things you do.
You need to set a target and make a plan: Every pilot has a flight plan. The plane is probably off course for 99% of the flight but the importance of the plan is undeniable. You need to begin with the end in mind – without knowing what you are aiming for you will never hit the target. Figure out what you really want in life and what you need financially to make that happen. This is very personal and can be anything from overseas holidays, to helping family out, to having money behind you to launch a startup.
This is where you can now work out what you need to do to achieve your goals. The plan will help answer questions like:
- How much do you need to put aside each pay?
- When are you going to need access to the money?
- What sort of returns do you need to get?
Not allocating where your money goes: Most people have two bank accounts – one linked to their debit card and a savings account. This is a good start but doesn’t go far enough. The savings account is more like a second transaction account – rent, bills, direct debit, credit card and car loan repayments all come out of this account. Because of this there isn’t much left at the end of each month, and it doesn’t grow. Plus it’s so much harder to keep track of where everything goes.
Instead of this use a bucket approach – allocate some of your income each pay into different accounts (‘buckets’) for different purposes. The amounts in each bucket will be a % of your income so you can do this even if your income fluctuates from week to week. Some bucket examples that we like to use include:
- Travel fund
- Emergency reserve / buffer
- Bills & loans
- Investing (shares, investment property, super)
- Financial Freedom fund
You can then spend what you have left guilt free because you have already allocated your income to the best areas in advance. This is called ‘paying yourself first’ and is the number one way to make better use of your income.
Not automating your finances: Trying to keep on top of all your finances manually is tough. These days almost everything can be automated, which frees your mind up unbelievably. Most people have their rent and loan payments automated, so the next step is to automate the payments into the other accounts that you have. You can also add more to super, an investment or your loan automatically. Set up regular payments through your online bank account / app and all you need to do is check in to make sure things are still on track. This puts your finances are on cruise control and you can focus on the things that you do best!
The feeling of getting in control of your money is incredible. It clears your mind and makes you feel confident about your finances, rather than frustrated or anxious. The answer isn’t making more money, it’s about what you do with the money. These steps can help fix your money problems and get you started on the path to financial freedom!